ERD Example

Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer

frequency of loss	amount of reinsured loss	reinsurance premium	severity of reinsurer loss 1	ERD	risk transfer
10%	3m	1m	2m	ERD = 10% x 2m/1m = 20% > 1%	yes
10%	2m	1m	1m	ERD = 10% x 1m/1m = 10% > 1%	yes
10%	1m	1m	0m	ERD = 10% x 0m/1m =  0% < 1%	no
25%	200	100	100	ERD = 25% x 100/100 = 25% > 1%	yes

¹ This severity amount is net of reinsurance premium. For example, if the ceded loss amount were $100 and the reinsurance premium were $20, the severity net of premium would be $80, and it's this $80 value that would be used in the ERD forumla.

The last example is similar to E (2017.Fall #17c)

Note: In general you would calculate the ERD from a frequency distribution. The examples in the above table were simplified: There is probability p of a specified loss and probability (1-p) of no loss.

Back to Frei.RskTrans