F2016Q16
Hi,
I have 2 questions for this problem please:
when we have aggregate limit at $2M, is the deductible of $1M also counted in this $2M, so the true coverage provided is only 1M?
for c), if I had to calculate the ERD, is this the correct way to do it? and how would I conclude since 2/3 scenarios pass the ERD tests?
100 yr pml: frequency 0.01 * severity (50M-50M-5M)/5M=-1, ERD = -1% < 1% no risk transfer
200 yr pml: frequency 0.005 * severity (200M-50M-5M)/5M=29, ERD = 15%>1%
500 yr pml frequency 0.002 * 59, ERD =12% >1%
Thanks!
Comments
Hi,
No the true coverage is 2M. In order to reach it, you would have to have 3M worth of losses in the layer 2M XS 1M.
Example: 3 losses of 1.5M, payout = 1.5M (losses in the layer) - 1M Agg deductible = 0.5M payout.
Example: 3 losses of 3M, payout = 6M (losses in the layer) - 1M Agg deductible = 5M
However, we have an aggregate limit of 2M. So we have a 2M payout.
Yes that is correct. I'm not sure where the 29 comes from in your 200yr pml calculation but you got the gist of it
Also as a note, you would do some sort of weighted average of the three scenarios to determine if there is a risk transfer
Is the XOL always applied at each individual claim level or at an aggregated total claim level? It seems that you're applying at individual claim level, but is this also possible using the same example?
Example: 3 losses of 1.5M, payout = 4.5M (losses in the layer) - 1M Agg deductible = 3.5M payout.
Example: 3 losses of 3M, payout = 9M (losses in the layer) - 1M Agg deductible = 8M
Thanks!
Yes, it would be possible. I just assumed it is a per risk XOL in this question. Aggregate XOL contracts do exist. It really depends on the terms of the contract
Hi,
I'm still so confused about the reinsurance payout, for this example:
when we calculate the reinsurance payout, the $1M retained by the insurer in ($2M excess of $1M), is it not the same as the deductible of $1M? are self retention and deductible 2 different things? when insurer has a loss of $3M, it retains the first $1M no matter what, and out of the remaining $2M, the reinsurer again deducts $1M from the payouts due to deductible, there's then only $1M left (before considering the reinsurance prmeium and aggregate limit)
Thank you!!
It is not the same. As there is an aggregate deductible and limit, the XOL policy is probably on a per risk basis.
Self retention and deductible are different things. This website has a really good example: https://www.alignedinsurance.com/deductible-and-self-insured-retention/
For the 3M loss - You are correct here
for i, if you have 3M XS 1M instead, all else equal in the question.
max loss = 4M THEREFORE max reinsurer payout = 2M (because retention = 1M and deductible = 1M) THEREFORE max reinsurer loss = 2M - (premium of 1M) = 1M
1M loss /1M premium *prob.
how to find the prob in order to determine whether there is a transfer off risk?
It would have to be given in the question
Hello @Staff-T1,
I am not very convinced why the MAX Loss=3 milion. Can you please explain?
Suppose we reinsure 10,000 risks. The aggregate losses on the 10,000 policies could equal say 10 millions. The first minion goes to deductible. WE have 9 left which goes to reinsurance of 2mil XS 1 mil, so reinsurer retains 2 millions. Since reinsurer premium is 1 milion, there is potential loss.
Im not sure why we need to consider two seperate losses of 3 mil each when the question say "aggregate" limit and "aggregate" deductible.
Thanks!
The Maximum loss in the question here is 1M?
Hello, @Staff-T1 ,
Can you please explain why we use max loss =3 milion here?
The reinsurer only takes the layer 2M XS of 1M. 2M + 1M = 3M. You would then consider the aggregate deductible and limit