Question 18 d.
Hello Graham,
I have a question regarding the ERD calculation in this problem (Question 18 d.)
ERD = Frequency x Severity as % of premium
In this problem, here's how I would have calculated the ERD:
Freq = 6%
Severity = Expected Severity / Premium = 1000 / 150 = 666.66%
ERD = 6% x 666.66% = 40% > 1% threshold so there is risk tranfer.
Althought, in the answer sheet, the severity = Premium / Expected = 150 / 1000 = 15%
ERD = 0.9% < 1% threshold so no risk transfer.
Just wondering what's the correct answer here!
Thank you 
Comments
Yes, you're [mostly] right. Hopefully Graham will fix soon...
ERD = Sum of... MAX(-profit,0) x p(-profit)
Since p(-profit) =6% and MAX(-profit,0) = 1000 - 150 = 850. The expected losses =
850 x 6% or 51. Premium = $150. So ERD = 34%
Thx chrisboersma. Instead of changing the answer, I have restated the question to make the given answer correct. The restated question would be:
premium: 1,000
probability of loss: 6%
expected severity: 150 (net of premium)
And just to be clear, the gross loss here would be 1150. You have to subtract the premium of 1000 to get the net loss. Then ERD = 6% x (150/1000) = 6% x 15% = 0.9%
This change will be uploaded for the 2019.Spring exam cycle.
Oh I see. Thanks to both of you!