ERD formula - QUESTION
Is the correct ERD formula the one in BA here: ERD = prob(NPV reinsurer loss) x NPV(reinsurer loss) / (reinsurance premium)
or should it be ERD = prob(NPV reinsurer loss) x NPV(reinsurer loss) / NPV(reinsurance premium)
Going through Examiners reports it looks like the Premium in the denominator should be NPV(reinsurance premium)
Comments
In this formula, losses are assumed to be paid out in time, while premium is assumed to be received immediately.
Some exam questions may have put a spin on when exactly the reins premium is received that calls for it to be discounted.
so if the premium is received immediately then the Premium already = NPV premium correct? So, just for clarity , for 1 all-encompassing formula, would the
ERD = prob(NPV reinsurer loss) x NPV(reinsurer loss) / NPV(reinsurance premium)
be the correct way to account for all scenarios?
Technically yes. Premium is conceptually up-front, compared to losses that are lagged in payment. That's why the formula doesn't bother with "NPV" for premium.