A simple probabilistic model to combine losses arising from the simultaneous occurrence of several hazards

Abstract

A simple model is presented to combine, using a probabilistic approach, the losses arising from several hazards that are triggered simultaneously by the same event. The merits of the model are presented, demonstrating the intuitive appeal of this combination rule. Assuming that the losses due to individual hazards are conditionally independent random variables with known mean and variance, expressions are given to compute the mean and variance of the combined loss. Finally, an approximate method is given to construct the probability distribution of this combined loss.