BC: given a 5% chance of a 25% loss: does risk transfer exist?
can you explain why the 10-10 rule is no. I was trying to figure out how to back into the math for this one.
since we are told there is a 5% chance of 25% loss, how do we know there is not a 10% change of a 10% loss?
Comments
Is it because it was really a 25% LR and not a 25% loss to the company?
Which question is this in regard to please?
I believe this is in reference to BattleQuiz 2, Question 8. I have the same question as the OP. It is given there is a 5% chance of loss > 25%, and asked whether the 10-10 rule is satisfied. The answer is no, but I'm not sure how that conclusion is made. If, for example, it said there was a 5% chance of a loss > 9%, then I could see how one could conclude 10-10 is not satisfied, but with the given 25%, I'm unsure how to back into the answer given.
sorry somehow I missed the Staff response to the question above.
I'm curious how do you want Battle Card questions asked. the title to my question is the BC question. I guess I was assuming you knew that BC stood for Battle Card but I feel like I have seen that abbreviation used on this site before.
It is the 15th BC in the Freihaut.Reins quizzes if you look at all questions for Freihaut.Reins
I was reading it again and I guess we are assuming there is a 95% chance of no loss. which is why it fails 10-10.
I think if I had a question like this on the exam I would state that assumption.
10-10 rule has two conditions: chance of loss has to be >10%, and amount of loss has to be >10%. The test is failed if either of them does not hold. By contrast, the EPD test uses the expected value of loss. In this case, it is 5%*25%=1.25%. This is >1%, so the test is passed.
Does the 10-10 rule require us to account for time value of money like EPD? For example in Fall 2018 Q15. I know why the 10-10 rule fails her but if instead there was 10% chance of 16,000,000 loss, would we have to compare that to 110% of the present value of the premiums or would we just use the 110% of the total premium amount?
Observe the following passage from the source text:
". . . Neither SSAP 62 nor FAS 113 provide a clear numeric trigger of when risk transfer fails. The “10-10” rule was developed as a benchmark to give meaning to the criteria in the two accounting standards. The “10-10” rule says that a reinsurance contract exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for the reinsurer.
Another method that has gained acceptance and overcomes some shortcomings of the “10-10” rule is the Expected Reinsurer Deficit (ERD). ERD can be viewed as the probability of a net present value (NPV) underwriting loss for the reinsurer multiplied by the NPV of the average severity of the underwriting loss. A treaty is typically considered to exhibit risk transfer if ERD is greater than 1%, which is consistent with the “10-10” rule (10% loss multiplied by 10% chance is a 1% ERD). Therefore, contracts that qualify for risk transfer under the “10-10” rule generally qualify under a 1% ERD. We will discuss thresholds more in the next section. . . . "
Notice how the 1% threshold of ERD is rationalized by the "tens" of the 10-10 rule. This would suggest that the 10-10 rule is subject to the same time value considerations as the ERD rule.
However, 10-10 has been applied without accounting for time value in previous exams.