ERD Example
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Some simple examples for the ERD (Expected Reinsurer Deficit) test for risk transfer
frequency
of lossamount
of reinsured lossreinsurance
premiumseverity of
reinsurer loss 1ERD 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.
