Rating based method
In the wiki, it says that this method "uses financial strength rating of insurers as the basis", but shouldn't it be the financial strength rating of reinsurers as the basis? This aligns with the example in the wiki below and makes more sense for the estimate to be based on reinsurer financial strength
Comments
We seem to have used the term "insurer" loosely in this case, as in a reinsurer is also an insurer. You are correct that the ratings are those of reinsurers.
I've changed "insurers" to "reinsurers". Thx!
Another type of question related to rating based method.
If an expected cumulative default rates have been used to calculate URR, for each year, why we still need to sum the result of all year but not just using the last year?
I was thinking the cumulative default rate like CDF (instead of LDF).
There is a chance of default in every year. Expected loss needs to be calculated for the ceded billings of every year, using the default rate particular to each year.
Cumulative default rate is the prob. of the reinsurer surviving until a given year and defaulting in that year, also considering likely credit-rating changes it may experience until that year. It is applicable to the billings of the given year in calculating the expected loss of that year.