A METHOD FOR CALCULATING THE PROBABILITY OF RUIN OF AN INSURANCE COMPANY

Abstract

Insurance companies frequently ask their actuaries to do calculations of the probability of the company being ruined. These calculations are based on complex data analysis of the last insurance period, which requires building mathematical models and using the data as an input parameter in these models. For this purpose, an algorithm, which presents a simplified mathematical model and provides approximate results of the outcomes (later used for managerial decisions), was prepared. Modeling of different outcomes based on various different inputs shows that the probability of the company to become ruined is inversely proportional to the written premium. The algorithm developed in this paper is illustrated with tables. The model is presented to the reader in a way that the reader can reproduce the calculations and build a custom data model.