On Page 10 Chapter 15 it says: "The steepness of the curve is related to the severity of the loss distribution. The closer the curve is to the diagonal the greater the proportion of losses (relative to M). So in the example below, curve A is the most severe and curve C the least" What does this mean? How can i "read" the graph to understand the description?
Hi LastHurdles A severe curve is one where a larger proportion of the losses are for larger amounts. So if we look at the graph on Page 10 and consider a loss of half of the sum insured (so y=0.5). For curve A, only around 60% of the total loss cost (G(y)) is for losses less than 50% of the sum insured. Hence 40% must be for losses above this level. For curve B, nearer 80% of the total loss cost is for losses less than 50% of the sum insured and for curve C nearly all of the loss cost is for losses less than 50% of the sum insured. Hence curve A has the more of the loss cost weighted towards larger amounts (as a % of sum insured) so it is the most severe curve. C is the least severe curve.
