Pricing Stop Loss

[Cathy]

In the Q&A bank, Q3.16 i) and Q4.21iii) are both about pricing a stop loss treaty but have very different answers. Q3.16 seems a standard pricing answer - ie collect data, adjust data, fit model, add loadings. But Q4.21 is more vague and high level. Does anyone know what there is in the question wording that points towards which type of answer they want?

Also, Q3.16i) is worth 5 marks, but has more in the answer than Q4.21iii) which is worth 12 marks! How do we know how much to write?

 

[Coralie Clarke]

Yes, both of these questions relate to the pricing of stop loss reinsurance.

The answers differ in their style but both mention important concepts like collecting historical or other relevant data, choosing the distribution to use and adjusting for changes in cover/inflation/the market etc.

For Q3.16(i), the question asks you to "outline" and there are only 5 marks available. This would indicate that you should do a relatively brief answer. There are lots of points to make for a complete answer, but with only 5 marks (9 minutes) available, you won't be able to give loads of detail for each.

Q4.21(iii) is similar but you need to make sure you link into the information calculated in the previous parts of the question because questions do tend to follow a theme.

In an exam, I would probably try to make the answer closer to the one given in Q3.16 as it gives a bit more detail and is more "to the point" but do always make sure you relate your answer to the information given in the question and avoid just giving a generic answer.