Industrial Risk Measurement in Insurance: Analysis of Loss Quantification Methods

Abstract

This article thoroughly examines the crucial issue of risk quantification in two essential domains: insurance and business enterprises. Based on a database compiled by an industrial risk specialist, cataloging incidents and their severity, we examined various design techniques as well as the distribution of loss levels experienced by industrial sector companies. Once the distribution of losses has been established, whether through parametric, nonparametric, analytical methods, or via Monte Carlo simulations, progressing towards the risk measurement phase becomes imperative.

Risk measurement, a fundamental aspect of this endeavor, emerges as an intrinsically linked function to the losses incurred (or profits gained). Its role is to precisely assess the level of risk closely associated with a given loss distribution. Among the various risk measurement methods, those centered on premium calculation principles stand out. These principles establish a methodology to determine a suitable premium to be charged to the insured, taking into account the nature of the loss distribution.

Another aspect explored in this article focuses on risk measurement techniques that play a vital role in determining the necessary equity capital to support the company's operations. In this specific context, attention is primarily directed towards the quantile of the loss distribution, a concept commonly referred to as "Value at Risk" (VaR).

In summary, the article paints a compelling picture of crucial significance of risk quantification, both in the landscape of insurance and within the fabric of businesses. To this end, highly strategic measures such as premium calculation principles and the "Value at Risk" (VaR) indicator emerge as indispensable tools to efficiently assess and manage risks inherent in financial losses. This in-depth reflection highlights the importance of these approaches in a complex economic and financial environment, where risk management proves pivotal for long-term viability and prosperity.

Keywords:  Insurance, premiums, risk management, risk quantification, insurance coverage

JEL Classification: B16, C10, G22, G32

Paper type: Empirical research.