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Difference between aggregation and accumulation of risk

D

DanielZ

Member
In chapter 5, section 3.2 is entitled "Limitation of exposure to risk or spreading of risk (single risks, aggregations of single risks, accumulations, multi-class losses)"

What is the difference between "aggregation" and "accumulation" as referred to above? It seems that both terms relate to risks which are related / correlated to each other.

Is the following correct:

- "accumulation" refers to a case where the insurer is exposed to the *same* risk from multiple different sources, eg through fronting.

- Whereas "aggregation" refers to different risks but which are still nonetheless correlated with each other, eg 2 houses in the same geographic location.

Thanks!
 
Passing comment - I'd say what you have written sounds right but in my limited experience the terms do tend to be conflated in practice, as it's often clear that only one or definitely both apply.
 
Interesting one this. I would tend to say an accumulation is a single event or set of related events that gives rise to multiple losses. (I'm deliberately circumventing certain knotty issues here, such as whether the Twin Towers of 9/11 was one event or two. The answer doesn't matter - it's still an accumulation.)

The text specifically refers to "aggregation of single risks" which implies that it could be from several unrelated events.

It's also worth noting the distinction that is conventionally made between an event, e.g. an earthquake, oil spillage, etc. and a risk, which will normally refer to an individual policy. One event can expose several risks.

I think what I'm saying is not very far from what you were suggesting.
 
Thanks for your replies. Section 3.2 does imply that aggregations of single risks can come from a common or related event - "... Thus the geographic location of a risk or group of risks is an important consideration in reinsurance purchases. An insurer must control its aggregations of many individual risks in one specific area or zone, especially if those risks are subject to natural peril events."

Reading that section again, I think in the context accumulation is used specifically for a case where the insurer has a larger than expected exposure to a single risk (i.e. individual policy, as you note) - "An insurer might also accept business from different sources. [Acted adds: Different sources might include fronting and reciprocal arrangements.] Therefore an insurer could have an accumulation of different interests on the same risk."

However the Acted notes in this section do seem to refer to the 2 terms almost interchangeably at times.
 
To be honest, I think if this shows anything it's just that the context rather than the choice of word is more important for determining the intended meaning.
 
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