Fall 2019 #19
I understand how they get the second solution in the examiner's report, but I can't figure out what's wrong with the way I did it. First I found the HO charge before the LCF, which is 4.1176 million. Why can't I then take this amount and divide by the sum pre-LCF, ie 12/.85? This gives an answer of .29 which is wrong.
Comments
HO charge is:
12/.85 - (3.8 + 4.7) = 5.617
It is not 4.1176.
Yes, I saw that calculation in the solution, but I still can't understand what's wrong with the way I did it. What's the issue with (12-3.8-4.7)/.85? Wouldn't the HO charge be the total minus the charges for PPA and OL (numerator), and then we divide by .85 to get the charge before loss concentration?
You may be tempted to think that the $12 at R4-Total is the sum of R4 for each line. But in fact, the $12 also includes the loss concentration factor (LCF).
LCF has to do with the distribution of loss reserves among different lines. See the link below for how it's calculated:
https://battleacts6us.ca/wiki6us/Odomirok.19-RBC#:~:text=Odomirok%20%2D%20R4%20example
It is applied after the R4 charges are calculated for each line, and summed up. If you have only one line, LCF is 1, its maximum value. As the share of total loss reserves in your biggest line drops, so does LCF. So in fact, there is no such thing as the "before LCF" charge of any one given line: LCF is applied to the total charge for all lines.
They expect you to assume that $12 already has the LCF applied, because it is integral to the final R4 charge, and that is what they invoke with the R4-Total cell. That's why you can't solve in the way you suggest.
This makes it so clear for me now, thank you so much!
Sure, good luck.