FIN 3440 Lecture Notes - Lecture 1: Property Insurance, Shoplifting, Lightning
Document Summary
We can define risk in our course as the possibility of an unfavorable variation from a desired result. An individual, for example, desires that his house will not burn down, and that he will not die prematurely, but the possibility of an unfavorable outcome in either case exists nevertheless. An insurance company hires professionals (actuaries) to predict losses and to develop insurance pricing (premiums) so that the company is profitable, but an understatement of forecasted losses and the resulting unfavorable variation in forecasted company profits is possible. The concept of expected value that you learned in statistics is also useful in assessing risk for our purposes because it captures the probability and severity of a loss in the calculation. For example, if the potential severity of a loss ,000,000 but its probability of occurrence is 1%, the expected value of the loss is only ,000.
