April 2017 Question 2 Part ii

[padasala]

Hi,

The question basically provides the expected aggreagate claims cost for different limits (with an excess of $1M).

It then asks what the expected claims cost for reinsuring a layer of $1M xs $1M is with:
1. unlimited reinstatements with $1M annual aggregate
2. one free reinstatement
3. one free reinstatement with $1M annual aggregate

How does this work? I'm very confused how they are equating the claim costs to the aggregate limits

 

[Ian Senator]

The wording of the question is not clear, so the examiners will be a little flexible, as long as you explain clearly how you are interpreting the information given, and then carry out the calculation consistently, stating your assumptions. Further discussion of various ways of interpreting it are described in ASET.

 

[Qayanaat]

Hi,

I have gone through the solution in ASET. Like padasala, I am still confused why they are equating expected aggregate claim cost with aggregate limits.

Expected claims cost of a company should just be dependent on its claims experience, no? Why is it increasing as aggregate limit is increasing? What's the connection between the two? The expected aggregated claims costs presented in the table are from ground-up, aren't they? How do their value depend on the aggregate limits?

Thanks for all the help.

 

[Darren Michaels]

The table is showing you the expected aggregate claims costs to the class of business depending on the aggregate limit provided by the insurer. The greater the limit of cover provided the greater the expected aggregate claims cost.

 

[Qayanaat]

Ah ok I understand now, thank you.

 

[o.menary11]

Hi,

On this question, it seems (to me) that we are ignoring the XS. If true, why is this?

For example for a), we consider the "Expected Aggregate Claim Cost" for unlimited reinstatements less that of $1m (i.e. the deductible) why have we also not take account of the expected aggregated claim cost of the $1m excess i.e. $1289000-350000-350000?

Thanks

 

[Darren Michaels]

The Examiners were interpreting the information given in the table as already allowing for the excess of $1m. In other words,
the table tells you the expected aggregate claims cost to a layer $xm xs $1m, as x varies.

As Ian said above, "the wording of the question is not clear, so the examiners will be a little flexible, as long as you explain clearly how you are interpreting the information given, and then carry out the calculation consistently, stating your assumptions."