Difference between revisions of "ERD Example"
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| − | <span style="color: red;">'''<sup>1</sup>'''</span> | + | <span style="color: red;">'''<sup>1</sup>'''</span> The NPV is ''net of reinsurance premium''. For example, if the ceded loss amount were $100 and the reinsurance premium were $20, the ''NPV(reinsurer loss) 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 <u>frequency distribution</u>. The examples in the above table were simplified: There is probability ''p'' of a specified loss and probability ''(1-p)'' of no loss. | '''Note''': In general you would calculate the ERD from a <u>frequency distribution</u>. The examples in the above table were simplified: There is probability ''p'' of a specified loss and probability ''(1-p)'' of no loss. | ||
Revision as of 17:16, 15 December 2018
Formula:
ERD = prob(of NPV reinsurer loss) x NPV(reinsurer loss) / (reinsurance premium)
Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer:
prob(of NPV reinsurer loss) NPV
of reinsured lossreinsurance
premiumNPV(reinsurer loss) 1 ERD risk transfer 10% 3m 1m 2m = 3m - 1m ERD = 10% x 2m/1m = 20% > 1% yes 10% 2m 1m 1m = 2m - 1m ERD = 10% x 1m/1m = 10% > 1% yes 10% 1m 1m 0m = 1m - 1m ERD = 10% x 0m/1m = 0% < 1% no 25% 150 100 50 = 150 - 100 ERD = 25% x 50/100 = 12.5% > 1% yes
1 The NPV is net of reinsurance premium. For example, if the ceded loss amount were $100 and the reinsurance premium were $20, the NPV(reinsurer loss) 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.
