# Loss Frequency and Loss Severity

• Loss frequency is defined as number of losses over a specific period of time
• Loss frequency is often modeled with Poisson distribution
• In Poisson distribution, mean and standard deviation is equal to the single parameter, lambda.
• Loss severity is defined as the value of financial loss suffered
• Loss severity is modeled using lognormal distribution
• Loss frequency and loss distribution are combined to simulate the expected loss distribution.
• This is known as convolution
• Monte Carlo Simulation process is used to run this simulation