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Frequency follows a Poisson Distribution with mean 7. We know that 40% of losses are of...

Frequency follows a Poisson Distribution with mean 7. We know that 40% of losses are of size greater than $50,000. Frequency and severity are independent. Let N be the number of losses of size greater than $50,000. What is the probability that N=3?

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Answer #1

The probability that a loss is of size greater than $50,000 is given here as 0.4. As the total number of losses mean is 7, therefore the average total number of losses with loss is of size greater than $50,000 is given here as: 0.4*7 = 2.8. Therefore the distribution of such kind of loans here is given as:

The probability therefore here is computed as:

Therefore 0.2225 is the required probability here.

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