Estimating the Cost of Commercial Airlines Catastrophes. A Stochastic Simulation Approach by Romel Salam, FCAS, MAAA March 2003. Simulation Model Better reflects current environment in terms of exposures, frequency, fleet composition, liability and hull costs, passenger loads.
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A Stochastic Simulation Approach
by Romel Salam, FCAS, MAAA
Better reflects current environment in terms of exposures, frequency, fleet composition, liability and hull costs, passenger loads.
Provides results that are statistically stable even for layers exposed to rare events.
Allows one to better understand all the components in the loss process.
More conducive to pricing covers with a lot of bells and whistles.
Traditional Experience Rating
May not reflect current environment
Results not statistically stable, especially for layers exposed to rare events.
No attempt to piece together loss components.
Not very good for pricing covers with lots of contingent features.Why a stochastic Model?
Choosing a frequency model
Picking an exposure base:
b) Miles/Kilometers Flown
C) Hours Flown
Accounting for Trend in Frequency
Modeling the number of aircrafts involved in an accident.
Passenger Liability Cost
Third Party Liability Cost
The r’s are random draws from the F’s.
Let the s’s = 1 when the r’s fall in the confidence
interval, 0 otherwise.
If our Hypothesis is true, then
Information and Assumptions
Similarly to the use of simulation in property catastrophe analysis, for commercial aviation, simulation may:
Some areas in need of more work