Which scenario best describes a risk that could threaten insurer solvency due to aggregation?

Which scenario best describes a risk that could threaten insurer solvency due to aggregation?

• A. A single large claim
• B. Frequent small claims over time
• C. A large-scale disaster causing many simultaneous claims
• D. Independent events across portfolios

Answer: (C)

Aggregation risk is the danger that losses from different parts of the business sum to a much larger amount than anticipated because those losses are correlated. A large-scale disaster fits this perfectly: it triggers many claims at once across a broad area, so the insurer faces a mass of simultaneous losses. That concentration can overwhelm reserves and reinsurance coverage, threatening solvency. An isolated very large claim, while potentially severe for a single policy, doesn’t create a broad, simultaneous hit to the portfolio. Frequent small claims increase total losses over time but are typically uneven and usually manageable through pricing, reserving, and diversification. Independent events across portfolios are actually the kind of diversification that reduces aggregate risk, not increases it.

Aggregation risk is the danger that losses from different parts of the business sum to a much larger amount than anticipated because those losses are correlated. A large-scale disaster fits this perfectly: it triggers many claims at once across a broad area, so the insurer faces a mass of simultaneous losses. That concentration can overwhelm reserves and reinsurance coverage, threatening solvency.

An isolated very large claim, while potentially severe for a single policy, doesn’t create a broad, simultaneous hit to the portfolio. Frequent small claims increase total losses over time but are typically uneven and usually manageable through pricing, reserving, and diversification. Independent events across portfolios are actually the kind of diversification that reduces aggregate risk, not increases it.