ERD: NPV vs average severity of UW loss
it seems like NPV and average severity of UW loss are used interchangeably. why is that?
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it seems like NPV and average severity of UW loss are used interchangeably. why is that?
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I don't think there is a particular reason. I suppose NPV would include both a severity and frequency component whereas average severity would not account for frequency. In an ERD problem however, maybe it's clear from the context how to interpret the given information.
If there is an example you're thinking about, maybe that would help me give you a better answer to your question.
it is 2019 F 27 part b. I am confused about the sample answers given. Thanks.
Try taking a look at part (b) of the following exam problem that demonstrates the calculation involved in the ERD test:
Also, try looking at similar exam questions from other years that ask the same question about describing the ERD rule. You can see which exam questions cover this topic from the BattleTable at the link below:
If this doesn't clear things up, let me know. (Try to be specific about what it is you don't understand so that I can make sure to address your concern.)
Hello, I have a similar question to what was asked above as it pertains to Spring 2016 Q26. I am keep seeing the ERD described as "The probability of a net present value underwriting loss for the reinsurer multiplied by the NPV of the average severity of the underwriting loss." Why is it always referred to as severity? In my experience severity would be the aggregate loss divided by the number of claims. The ERD formula divides by premium. I have seen frequency computed as number of losses divided by premium but I have never seen the denominator for severity be premium. Is it typical to refer to severity as loss divided by premium?
This is how the wiki describes ERD:
https://battleacts6us.ca/wiki6us/Freihaut.Reins#:~:text=Calculate%20ERD%20(Expected%20Reinsurer%20Deficit)%3A%20ERD%20%3D%20prob(NPV%20reinsurer%20loss)%20x%20NPV(reinsurer%20loss)%20/%20(reinsurance%20premium)
It does not use the term "average severity."
I would need to see where it was described in this way. But from the looks of it, it was not used in the general sense of "average severity." Rather, it was used to mean "what the event of a reinsurer loss looks like, for which a probability of occurrence is given." So, with 3M potential loss and 1M premium, the NPV of the average severity of the underwriting loss is 3-1=2M.