Hi, In Chapter 20 page 33 there is an approximation for calculating the discounted cost (from the original RI premium) of a Reinstatement Premium. I'm struggling to get my head round how the calculation works. We are told 'If P is the cost of a reinsurance contract with one free reinstatement, and P' is the upfront cost of one reinstatement at 50%, then P' + 0.5*p'*P(at least one claim) = P. Is this section saying that we can estimate the cost of the reinstatement by assuming the cost of the original contract equals the expected cost of all reinstatements (including the theoretical cost of a reinstatement when one is free)? So in the above example, P' is the theoretical cost of the free reinstatement, and then 0.5*P'*P(at least one claim) is the expected cost of the second non-free reinstatement at 50%? I could be completely wrong though - hence my confusion! Thanks, Joe
Hi Joe You'll probably understand it better if you change the Core Reading from 'upfront cost of one reinstatement at 50%' to 'upfront cost of a contract that includes one reinstatement at 50%'. All they're saying (I hope) is that the cost P of a contract that already includes one free reinstatement, is the same as a contract where you pay P' upfront then another 0.5P' if you reinstate. Ian
