2017 Fall 17 c
Hi,
I am a bit confused on how the calculation works.
I see that the scenario A and B would not incur any loss since Loss + LAE is under 600 in both cases.
For the scenario C, it's 800+200 = 1000 and the reinsurer would cover 100% above 600 so it would cover 400.
The premium is 100. So under the ERD or 10-10 rule, isn't the severity 400/100 = 400% and the frequency 25%?
In both the sample answer 1 and 2, they seem to calculate the loss to the reinsurer to be 100$ so I'm not sure how this calculation works.
Thank you,
Comments
It's Losses & LAE and Losses Paid. It's a little confusing to see Incurred +LAE included with Paid Losses. The amounts are a little bit of confusion because it seems to suggest LAE will be 3x as large as losses. But, alas, CAS exam questions are not always based on reality.
You don't need to add the columns together - just use one or the other. In this case Incurred +LAE (ignore paid).
800 - 600 (deductible) - 100 (premium) = 100 loss
Yes, that's correct and I've also added a short example in the wiki:
http://www.battleactsmain.ca/wiki6c/ERD_Example
ok, Instead of "Incurred Losses" & "Adjustment Expenses", I had read "Incurred" "Loss Adjustment Expenses" and thought 200 Losses in the second column was extra.
It makes sense now. Thanks
for the ERD calculation, the severity of reinsurer loss is 800 - 600 (deductible) - 100 (premium) = 100 loss. ERD = 100 loss /100 premium *25% = 25%. Where did I go wrong?
You did it correctly
Hello, I had the same question as @evammmmai
Why does the solution calculates (100-200)
Thanks!
Maximum loss is 800 - 600 (retention) = 200
100 is the premium
how can you tell there are no limiting risk transfer contract features?
You just have to scan the given information for risk-limiting features, and in this problem there aren't any that would impact the assessment of risk-transfer. Examples of risk-limiting features might be:
Sublimits:
Caps the amount payable for specific types of risks or losses.
Exclusions:
Certain types of risks or losses that aren't covered by the reinsurance contract.
Deductibles:
The primary insurer must cover a certain amount of the loss before the reinsurer steps in.
Ceding Commission:
A fee returned to the primary insurer, often adjusted based on performance metrics like loss ratios.
Risk Retention:
Specifies the percentage of risk that the primary insurer must retain.
Aggregate Limits:
Sets a maximum total payout the reinsurer is obligated to pay within a certain time frame.
Loss Corridors:
Specifies a range within which the reinsurer will share losses with the primary insurer. Outside of this range, the primary insurer is either fully responsible or fully indemnified.
Event Limits:
Puts a cap on how much the reinsurer will pay out for a single event, like a natural disaster.
Swing-Rated Premiums:
Premiums adjust based on the actual loss experience, swinging up or down.
Profit Commission:
Allows the primary insurer to share in profits if losses are lower than expected, incentivizing good risk management.
Note that not all of these are covered in the source text, and there could be lots of others depending on how clever (or deceptive) the reinsurers are trying to be.
For the 10/10 rule, I want to confirm if the 10% loss is based on the premium that the reinsurer receives.
Also de we have to multiply the 100 by 25% right?
Is the 10% loss already given that the loss event already occurred?
are we looking at E[X] or E[X|given loss event] for the 10% requirement.
Yes, it is 10% of the premium received. You don't have to multiply by 25% for the 10-10 rule, since you are looking at it separately. Alternatively, the 10-10 rule is also a 1% loss cost rule. In this case you would multiply it together.
The 10% loss they are referring to is a conditional severity, so just E[X|loss event]. You see this as they are specifically referring to scenario C, which means it is the expected loss given that we are in scenario C