Difference between revisions of "ERD Example"
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| − | Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer | + | Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer: ERD <span style="color: red;">'''='''</span> prob(of NPV reinsurer loss) <span style="color: red;">'''x'''</span> NPV(reinsurer loss) <span style="color: red;">'''/'''</span> (reinsurance premium) |
:{| class="wikitable" | :{| class="wikitable" | ||
Revision as of 17:10, 15 December 2018
Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer: ERD = prob(of NPV reinsurer loss) x NPV(reinsurer loss) / (reinsurance premium)
prob(of NPV reinsurer loss) amount
of reinsured lossreinsurance
premiumNPV(reinsurer loss) 1 ERD risk transfer 10% 3m 1m 2m ERD = 10% x 2m/1m = 20% > 1% yes 10% 2m 1m 1m ERD = 10% x 1m/1m = 10% > 1% yes 10% 1m 1m 0m ERD = 10% x 0m/1m = 0% < 1% no 25% 200 100 100 ERD = 25% x 100/100 = 25% > 1% yes
1 This severity amount is net of reinsurance premium. For example, if the ceded loss amount were $100 and the reinsurance premium were $20, the severity net of premium would be $80, and it's this $80 value that would be used in the ERD forumla.
Note: In general you would calculate the ERD from a frequency distribution. The examples in the above table were simplified: There is probability p of a specified loss and probability (1-p) of no loss.
