10-10: do we take PV of Excess Covg, or cap PV?
in the Freihaut numerical battle card, the loss is capped at the excess before discounting. Shouldn't it be the other way? it's tough to point to numerics since they get randomly generated, but see eg below
90%ile is 16, prim retention is 7 and excess is 6
calc is capping excess loss of 9 at 6 and then discounting
why isn't it discounting 9 and then capping at 6?
Comments
The "excess" is the accident loss that the reinsurer will be responsible for. It is that amount that should be discounted, for 10-10 testing.
I was thinking the excess meant the most the reinsurer will pay whenever the loss was paid, but I guess the reinsurer holds on to the value derived from the discounting
Your thinking about excess is correct, and the reinsurer holds the NPV of its reserves.
Neither of these mean that the ground-up loss is to be used for 10-10.
I think you may be confused about what "excess" is.
Say we're contemplating a ground-up loss of 11. The CP gives "primary retention" as 5. Then, "excess", the portion that the reinsurer is responsible for, is 11 - 5 = 6.
So, we're not "capping" the 11 at 6 per se.