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April 2011 Q6

C

ciza5

Member
Hi

Could you explain why we use the values from the oep table on part v. The question is to chose an attachment that protects against 'all'events, so is the AEP table not appropriate? The AEP table will include the 1 in 150 year event, will it not?

Thanks,
 
The AEP gives the probability that the aggregate losses from all loss events in a year exceed a particular threshold.

We are asked for protection against an event that occurs less frequently than 1 in 150 years, so we are interested in losses from a single event and not the aggregate loss across a series of events. It is reasonable to assume that when an event that is expected to occur less than once in every 150 years does happen it will be the largest event that year. Hence we should use the OEP table and not the AEP table.
 
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