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📊 '''Average annual loss (AAL)''' is a key metric in insurance and [[Definition:Reinsurance | reinsurance]] [[Definition:Catastrophe modeling | catastrophe modeling]] that represents the expected long-term mean loss per year from a defined set of perils across a portfolio or individual [[Definition:Risk | risk]]. Expressed as a dollar amount or as a percentage of [[Definition:Total insured value (TIV) | total insured value]], AAL smooths out the inherent volatility of catastrophic events by averaging losses across thousands of simulated years in a [[Definition:Stochastic model | stochastic model]]. It serves as the foundational building block for [[Definition:Risk-based pricing | risk-based pricing]], [[Definition:Reinsurance | reinsurance]] structuring, and [[Definition:Capital | capital]] allocation decisions.

🔬 Catastrophe modeling firms such as Verisk, Moody's RMS, and CoreLogic generate AAL by running simulations that produce an [[Definition:Event set | event set]] — a catalog of hypothetical catastrophe scenarios with associated probabilities and loss severities. Each event's modeled loss is weighted by its annual probability of occurrence, and the sum of all those weighted losses yields the AAL. For example, a [[Definition:Hurricane | hurricane]]-exposed coastal portfolio might have an AAL of $5 million, meaning that over a sufficiently long time horizon, the owner can expect to pay an average of $5 million per year in catastrophe-related [[Definition:Claims | claims]] — even though actual annual losses will swing dramatically from zero in quiet years to hundreds of millions after a major landfall.

💡 Insurers and reinsurers rely on AAL as the starting point for [[Definition:Technical premium | technical pricing]]: it establishes the pure [[Definition:Loss cost | loss cost]] before [[Definition:Expense loading | expense loads]], [[Definition:Risk margin | risk margins]], and [[Definition:Profit loading | profit loads]] are layered on. It also informs decisions about how much [[Definition:Reinsurance | reinsurance]] to purchase and where to set [[Definition:Retention | attachment points]]. Rating agencies and regulators scrutinize AAL figures when evaluating an insurer's [[Definition:Catastrophe risk | catastrophe risk]] exposure relative to available [[Definition:Surplus | surplus]]. Because AAL represents only the mean — not the tail — it is almost always used alongside metrics like [[Definition:Probable maximum loss (PML) | probable maximum loss]] and [[Definition:Tail value at risk (TVaR) | tail value at risk]] to capture the full shape of the loss distribution.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Catastrophe modeling]]
* [[Definition:Probable maximum loss (PML)]]
* [[Definition:Tail value at risk (TVaR)]]
* [[Definition:Exceedance probability curve]]
* [[Definition:Total insured value (TIV)]]
* [[Definition:Loss cost]]
{{Div col end}}

Definition:Average annual loss (AAL) - Revision history

PlumBot: Bot: Creating new article from JSON