What does Correlation mean? Read on to discover the definition & meaning of the term Correlation - to help you better understand the language used in insurance policies.
The extent to which multiple risk profiles move in relation to each other. Correlated risk profiles move in concert when affected by the same set of stimuli. For example, there is substantial correlation between the Dow Jones Industrial Average (DJIA) and the Standard & Poor's (S&P) 500 Index because both are affected by the same factors. In contrast, uncorrelated risk profiles (e.g., a book of ocean marine business and a book of products liability coverage) react to entirely different stimuli. The combination of uncorrelated risk profiles results in lower combined volatility.
We hope the you have a better understanding of the meaning of Correlation.