ABSTRACT
In this chapter, we introduce the frequency/severity loss model as a useful method to capture theoretically the loss-generation process. Section 6.1 (Aggregate loss models) is devoted to studying the properties of the collective risk model and the individual risk models and shows examples of situations in which they can be applied. Risk costing can then be reformulated (Section 6.2) as the problem of finding the correct distribution of claim counts (the frequency distribution) and of loss amounts (the severity distribution) and the value of the necessary parameters. Section 6.3 illustrates the revised risk-costing process based on the frequency/severity analysis.
