Hi all, when calculating the average cost per claim, i'm unsure why we just have the (integral between 100k and 300k) component plus the (300k to 500k integral component) WITHOUT any denominator integral which would represent the probability that the claim exceeded 100k at all. I was expecting a fraction in the solution here but just saw A + B. Is it something to do with for this question f(x) being 0 for x>500,000, or in practice is is it just A+B and not (A+B)/C where C represents proportion of claims exceeding the deductible/attachment point? Many thanks!
There are two ways to calculate this: Either we calculate the reinsurer’s average payout from all claims, and multiply by the expected number of claims, or we calculate the reinsurer’s average payout on claims in which it is involved, and multiply by the expected number of claims to hit the layer. You were attempting to use the second option. However, since we don’t know how many claims are expected to hit the layer, the solution has used the first option.
