The Theory of Risk

Summary The classical theory of risk is reviewed. It is shown to be a static theory and this is adduced to be its main disadvantage. A dynamic theory was introduced by Lundberg in 1909. This is discussed and Lundberg's achievement is reaffirmed. However, it is pointed out that this theory, in spite of extensive mathematical development, has found virtually no application in practice. The major difficulty lies in the formulation of insurance problems in a convincing way. In the last section a new approach is called for. A model incorporating dynamic features of Lunberg's collective risk theory with more realistic constraints is investigated. Possible directions for future research are suggested.