Ch15 - Section 2.4 - Pg 16 - Loss Cost for Original Risk vs. Ground Up Loss Cost

[David]

Hi,

I am looking at equation 2.4 on page 650 for C_L and I am a little confused about the following sentence:

"Here, the notation is the same as for equation (2.3) but with C representing the loss cost for the original risk (no longer ground-up) and d representing the original deductible."

Could you please help me understand the difference between C in the original sense of the equation (i.e. Ground up Loss Cost) vs the new sense of C when we are allowing for the deductible in this situation (i.e. Loss Cost for the original Risk)

Is the ground up loss cost the loss cost including all claims, even those less than the deductible? and the other being only those greater than the deductible or am I completely misunderstanding this?

Apologies if there is already a thread on this or if there is a specific section of the notes that would be better to look at

Many thanks,
David.

 

[David]

Just following up on this if anyone could provide any help with this question

Thanks!

 

[Darren Michaels]

Lets look at the example given in Chapter 15 on page 16.

Suppose you are a household insurer with an excess of £100 on each and every claim.

Then the ground-up loss cost would include everything, ie the total losses to the portfolio including the £100 excess on each claim.

Whereas the loss cost for the original risk (no longer ground up) is basically what the insurer ends up paying, so the sum of all claims less the £100 excess in each case.