Risk theory

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Risk theory connotes the study usually by actuaries and insurers of the financial impact on a carrier of a portfolio of insurance policies. For example, if the carrier has 100 policies that insures against a total loss of $1000, and if each policy's chance of loss is independent and has a probability of loss of p then the loss can be described by a binomial variable. With a large enough portfolio however, we can use the Poisson function for the frequency of loss variable where λ is used as the mean equal to the number of policies multiplied by p.