Capital Needed Above Expected Loss to Survive a 1-in-100-Year Disaster

Portfolio A

20
10%
$100

Portfolio B

200
10%
$100
Expected total loss
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Capital needed for a 1-in-100 year disaster (99th percentile loss)
—
Extra capital needed, above expected loss
—
Expected total loss
—
Capital needed for a 1-in-100 year disaster (99th percentile loss)
—
Extra capital needed, above expected loss
—
Distributions of possible total losses (relative to expected loss)
Portfolio A Portfolio B Expected loss (100%) A's 99th percentile B's 99th percentile

Note: Both distributions are rescaled to their own expected loss, so 100% on the horizontal axis means exactly the total loss amount expected any year for either portfolio. Policies within either portfolio are assumed to be independent.