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q and a. part 2. question 2.28

K

Kato Mayanja

Member
We need to calculate the reserve for a value of r such that
1. p( k30 < r+1) is greater than or equal to 0.01,and
2. p(k30 <r) < 0.01.
How do you come up with the first inequality?
 
Thank you Sid. I get it now. Wonder why they didnt use a simple P( k30=r)=0.99. Any thoughts ?
 
Nothing about this stuff is simple to someone like me so I probably can't comment :) but if you look at the solution carefully perhaps you can examine whether your logic fits.
 
Apologies, I had to remove my previous comment because it was flawed. I am revisiting this question and the first line of the solution read "The reserve V should be such that the probability of making a positive future loss should be less than 1%"... How is it that the question requires a reserve calculation that will meet the future loss with a 99% probability. This sound very different from the probability of making a loss. Secondly, the original question remains unanswered for me as well, which is how do you get the two conditions P(K30<r)<0.01 and P(K30<r+1)>=0.01. Comments appreciated. Thanks in advance.
 
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