#25: ERD calculation

marodriguezmarodriguez
edited March 25 in EXAM: 2018-Fall

For part a ii):
-Why isn't the $5M loss being added in anywhere in the computation? Like 0.95*5M/1.05^2? Is this only supposed to consider the probability of the worst possible loss?
-In the denominator, why is the PV of the $5M paid in July 1 being subtracted away rather than added in? Is this assuming they cancel the contract right away so there's $5M in premium that is lost?

Thanks

Comments

  • Staff - ACStaff - AC

    If the outcome is 5M loss, then the reinsurer does not have a deficit; deficit is zero. The chance of this is 95%. The calc is that of the deficit when the outcome is 16M, multiplied by its probability of 5%, to give the expected deficit.

    That's a typo. 2.34% is obtained by adding it, not subtracting.

  • tlindstromtlindstrom

    Separate questions relating to #25 ERD calculation.

    Intuitively, is the part where we're dividing by the reinsurance premium just calculating the ERD as a % of the premium?

    The calculation of 0.05 * (16/1.05^2 - 5 - 5/1.05^0.5) =0.23m is calculating the ERD as an amount?

    So, really they're asking for the ERD as a % of premium?

  • Staff - ACStaff - AC

    Yes, correct.

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