Individual Models

Overview


Individual portfolio models are models that model each conract in the portfolio individually, (see single insurance policy analysis ) and then take the sum of the outcomes of the individual contracts to be the portfolio outcome.
{% S = \sum_{i=1}^n X_i %}
If the number of claims and claim sizes are not independent, that is, they are correlated in some way, the modeling of each claim must account for this correlation.

Computing the Sum


Comparison to Loan Default


The modeling of an individual policy is very similar to the standard modeling framework used to model laon default, PD, LGD, EAD. Once can translate the variables from one framework to the other as follows.

  • PD (Probability of Default) translates to Probability of a Claim
  • LGD (Loss Given Default) translates to Claim Amount
  • EAD (Exposure at Default) translates roughly to Policy Limit

Contents