burning cost calc

[mattt78]

i'm a bit confused by Q&A bank 6, question 4, part (ii) which asks you to calculate the burning cost for an xol layer

The solution calculates the on-level monetary average annual cost to layer from the historical claims data. But then it does nothing else.

I thought a further couple of steps were required - firstly converting the premiums to be on-level (using historical and projected rate changes), and secondly, deviding the on-level claims by the on-level premiums to give a rate (expressed as a percentage), which is the burning cost.

Am I confusing buring rate with burning cost, or missing something? When asked to calculate a burning cost, is the solution a monetary amount, or a rate?

 

[Duncan Brydon]

The burning cost is a rate. It's the actual claims expressed as an annual rate per unit of exposure. (Some practitioners use “burning cost” to refer to a loss cost rather than a rate but that's not how the term is defined within the Core Reading.)

I therefore think the question is not worded as clearly as it could be. It would perhaps be simpler to just ask for a calculation of the expected losses to the layer in the 2010 underwriting year using a burning cost approach.

The data is not available in this question to do the more complex analysis you mention. The ActEd solution therefore states as one of its assumptions that exposure is the same in each underwriting year.

If the appropriate data had been provided then we wouldn’t need to make this assumption. Instead, we could adjust the exposure to bring it on-level as you suggest.

I hope this helps.

 

[mattt78]

burn cost calc

great, that makes sense now - thanks alot!