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An Application of the Distribution of Extremes in Insurance

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  • Edward Nissan
  • Iskander S. Hamwi

Abstract

This research investigates an application of the theory of extremes to insurance practice, with the aim of providing a methodology to estimate annual insurance premiums required to cover losses resulting from natural events with low probability. To that end, a case study using a thirty-year series of monthly data of the maximum one day amount of rainfall is undertaken. The approach is to estimate from available data the parameters (? , ? 2) which describe an initial population of the maximum observations, with these estimates then used to obtain the expectation and variance of the distribution of the largest of the maximum. Insurance premiums are calculated based on the latter estimates.

Suggested Citation

  • Edward Nissan & Iskander S. Hamwi, 1993. "An Application of the Distribution of Extremes in Insurance," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 16(1), pages 79-91.
  • Handle: RePEc:wri:journl:v:16:y:1993:i:1:p:79-91
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