Total Annual Loss Distribution: A Risk Management Decision Making Tool

The total annual loss (TAL) distribution is an important tool in risk management theory especially in the areas of determining contingency reserves and setting retention limits in stop-loss or excess-loss reinsurance treaties contemplated particularly by a young and emerging insurance company. This distribution is also an essential decision-making tool for a corporation attempting to implement a self-insurance program covering certain perails. The purpose of this paper is to examine briefly these two approaches and, more specifically, to indicate that, given the right set of circumstances, the Central Limit Theorem (CLT) approach is theoretically sound and constitutes and easier and more efficient way of obtaining the desired results. A method for enhancing the accuracy of these results by using loss information obtained from several years is also presented.