Hi, anyone can help me understand the following content in chapter 25 page 23 regarding estimate outwards Reinstatement prems : " if using a factor-based approach .... should be a blended factor if the assumed recoveries are intended to be a probability weighted distribution of potential losses , rather than applying the RI prog to the modelled recoveries as if they were the best estimate ... very confusing , definition for best estimate recoveries , isnt that same as "probability weighted distribution ..." ? also what actually this "blended factor" should be represented ? thank you very much for your time
A factor based approach would for example calculate reinstatement premiums as a % of the estimated RI recoveries. It will be some sort of weighted average percentage based on the full distribution of expected recoveries, instead of simply being based on the best estimate recoveries, to allow for the fact that there will be more reinstatements on the lower layers of cover.
