Would you please explain how to look up the ILFs ?? Why is there a policy limit and where has that been used?
Using equation (3.3) on page 26 of Chapter 15 of the Course Notes, we know that the cost of a layer L excess of D is C * (ILF(L+D) - ILF(D)), where C is the loss cost for some basic primary limit. In this question, the layer is changing from 900,000 xs 100,000 in 2009 to 1,000,000 xs 500,000 in 2010. So we can use the formula above to calculate the cost of the new layer in relation to the cost of the old layer (note C cancels out). The ILFs you therefore need are 100,000 and 1,000,000 for 2009 and 500,000 and 1,500,000 for 2010, which can be looked up directly from the table provided. The policy limit has been used to work out the top of the layer of cover provided in each year. For example in 2009 a layer of 900,000 xs 100,000 covers losses from 100,000 to 1,000,000 (=100,000+900,000).
Thanks! I have another doubt...although it seems silly, i'd really appreciate hel on this! Calculating cost to a specific layer requires C * (ILF(L+D) - ILF(D)). But somewhere i did see ILF(x)/ILF(b). In what situations do we divide ILFs? Or have I misundestood something?
ILF(x)/ILF(b) gives you the relative loss cost of a primary layer of size x (ie x excess 0) relative to a primary layer of size b where the loss cost is known. You need to start subtracting the ILFs when you are interested in a layer that does not start at zero. In your example below to get the cost of a layer of size L excess D, you take the cost of a layer of size L+D (excess zero) and subtract the cost of layer of size D (excess 0) to leave you with the cost of the layer that you want.
