EBCT model 2 practice question

[jmddgrs]

Just a query about practice question 4(ii) in revision booklet 4, which asks us to calculate the credibility premiums per unit of risk volume for risk groups 2 and 3, given the premium for risk group 1.

In the answer on pg. 79 it calculates Z(i) = Y(i) / (Y(i) + E/V) for i = 2,3 where Y(i) is the sum of the aggregate claims over five years for risk group i. However, when working back from the premium to find Z(1) it uses Z(1) = P(1) / (P(1) + E/V)) where P(1) is the sum of the risk volume over five years for risk group 1.

What's the reason for using the aggregate claims to calculate Z(2) and Z(3) as opposed to the risk volume, as for Z(1)?

 

[John Lee]

Just a query about practice question 4(ii) in revision booklet 4, which asks us to calculate the credibility premiums per unit of risk volume for risk groups 2 and 3, given the premium for risk group 1.

In the answer on pg. 79 it calculates Z(i) = Y(i) / (Y(i) + E/V) for i = 2,3 where Y(i) is the sum of the aggregate claims over five years for risk group i. However, when working back from the premium to find Z(1) it uses Z(1) = P(1) / (P(1) + E/V)) where P(1) is the sum of the risk volume over five years for risk group 1.

What's the reason for using the aggregate claims to calculate Z(2) and Z(3) as opposed to the risk volume, as for Z(1)?

Oops! We've made a mistake. Using the risk volumes instead we should get:

Z(2) = 0.2047
Z(3) = 0.1546

and credibility premiums per unit of risk volume:

risk 2 = 2.552
risk 3 = 2.589

I'll get this into the corrections document and loaded on the website.

Thank you so much for pointing this out and apologies for the confusion caused.

 

[jmddgrs]

Thanks very much.