2018 Q26 A
I am struggling to do this problem with your formula.
For contract #2 I am using:
PV( gross loss - retention ) - premium
= (40000-38000)-1000
=1000
then for
110% x premium =
=1100
Thus contract 2 fails the 10-10 rule. Am I applying the formula wrong?
Comments
Well, good question. There was an old question on Exam 6-Canada on the 10-10 method and the given solution was the one I discussed in the wiki article and in the practice template. In that version, the premium is subtracted from the loss before comparing to 100%xpremium. But in the 6-US problem, the premium is not subtracted.
I did further research on the 10-10 method and is seems that the premium indeed should not be subtracted.
I will need to change this. You did indeed follow the calculation as laid out in the wiki article, but if you don't subtract the premium, the loss is 2000 (not 1000), which is indeed greater than 110%xpremium=1100. (So risk transfer has occurred.)
Thanks for your observation.
Hi, for part c)'s last two sample sols, is prem included in the "avg severity UW losses"? That's what I thought, but seemed that in other problems, use ERD/prem to compare to 1% is also accepted by graders, so I am a bit confused.
No, "avg severity of UW loss" does not involve premium. It's a probabilisttic statement of loss. The last two solutions are remiss in explaining ERD in full, as we have it in the wiki. I can't imagine that they actually gave credit for these answers.