The Peaks over Thresholds Method for Estimating High Quantiles of Loss Distributions

Abstract

We review the peaks over thresholds or POT method for modelling tails of loss severity distributions and discuss the use of this technique for estimating high quantiles and the possible relevance of this to excess of loss insurance in high layers. We test the method on a variety of simulated heavy-tailed distributions to show what kind of thresholds are required and what sample sizes are necessary to give accurate estimates of quantiles.

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