ARM 401-3 RISK MODELING UPDATED ACTUAL Questions and CORRECT
Answers
1. Probability Analysis technique for forecasting events based on the assumption that future
events are based on unchanging probability distribution
applies to firms with stable operations and a substantial number of data
on past losses, assumes future losses will approximate past losses
2. Probability Distribution presents, in tabular or graphic form, all possible outcomes and their
probabilities for a set of circumstances
3. Probability measures the expected frequency of an event over time in a stable
environment
4. Impossible Events have a probability of 0
5. Certain Events have a probability of 1
6. Theoretical Probability theoretical and constant
(Priori Probability)
can be calculated without actual trials (coin flips, dice throws, card
draws)
used by mathmeticians
7. Empirical Probability practical and changeable
(Posteriori Probability)
computed from historical data from study samples (mortality rates,
battery lives)
outcomes are NOT as self-evident or self-limiting as theoretical proba-
bilities
8. Factors that improve the 1. the use of larger numbers of data
reliability of empirical 2. an org w/ more stable ops and loss patterns
probabilities include
, 9. Sources of Historical orgs own loss experience, loss experience of other orgs, countrywide
Loss Data data from insurers, insurance rating orgs, and national safety orgs
RM's use real world empirical probabilities developed from their firm's
own _ _ _
10. Law of Large Numbers applies to empirical probabilities
as the # of similar but independent exposure units increase, forecasts
of future events become more reliable IF
1. the past events occurred under substantially identical unchanging
conditions,
2. the future events can be expected to occur under the same unchang-
ing conditions, AND
3. the events have been, and will continue to be, numerous and inde-
pendent
11. Probability Distribution list or display of probabilities that provides a statistical representation
of the likelihood of the occurrence of a particular event or outcome
(.10 probability means 10% chance of loss)
12. What must exist for the- 1. mutually exclusive (only one can occur at a time)
oretical and empirical AND
probability distributions? 2. collectively exhaustive (no other outcomes possible
13. Mutually exclusive 1. losses caused by fires that start on weekdays (M-F & holidays)
events for fire losses to AND
a warehouse in a city 2. losses caused by fires that start on weekends
would include
14.
Answers
1. Probability Analysis technique for forecasting events based on the assumption that future
events are based on unchanging probability distribution
applies to firms with stable operations and a substantial number of data
on past losses, assumes future losses will approximate past losses
2. Probability Distribution presents, in tabular or graphic form, all possible outcomes and their
probabilities for a set of circumstances
3. Probability measures the expected frequency of an event over time in a stable
environment
4. Impossible Events have a probability of 0
5. Certain Events have a probability of 1
6. Theoretical Probability theoretical and constant
(Priori Probability)
can be calculated without actual trials (coin flips, dice throws, card
draws)
used by mathmeticians
7. Empirical Probability practical and changeable
(Posteriori Probability)
computed from historical data from study samples (mortality rates,
battery lives)
outcomes are NOT as self-evident or self-limiting as theoretical proba-
bilities
8. Factors that improve the 1. the use of larger numbers of data
reliability of empirical 2. an org w/ more stable ops and loss patterns
probabilities include
, 9. Sources of Historical orgs own loss experience, loss experience of other orgs, countrywide
Loss Data data from insurers, insurance rating orgs, and national safety orgs
RM's use real world empirical probabilities developed from their firm's
own _ _ _
10. Law of Large Numbers applies to empirical probabilities
as the # of similar but independent exposure units increase, forecasts
of future events become more reliable IF
1. the past events occurred under substantially identical unchanging
conditions,
2. the future events can be expected to occur under the same unchang-
ing conditions, AND
3. the events have been, and will continue to be, numerous and inde-
pendent
11. Probability Distribution list or display of probabilities that provides a statistical representation
of the likelihood of the occurrence of a particular event or outcome
(.10 probability means 10% chance of loss)
12. What must exist for the- 1. mutually exclusive (only one can occur at a time)
oretical and empirical AND
probability distributions? 2. collectively exhaustive (no other outcomes possible
13. Mutually exclusive 1. losses caused by fires that start on weekdays (M-F & holidays)
events for fire losses to AND
a warehouse in a city 2. losses caused by fires that start on weekends
would include
14.
