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TIA Clark

Posted 09-23-2009 at 11:01 PM by Hiu

TIA Clark question Quiz 11, #5 - 09-03-2008, 06:57 PM


Hi,

Here's my question. In the numerator of the solution below, shouldn't [E; 500,000] be [E; 500,000/1.1] and if not, why? Thanks.

Problem:

You are given the following information:
A ceding company purchases a property per risk excess of loss treaty
ALAE is included with loss
E[x;Z] = Z * (0.4)Z/1,000,000
ALAE as a percent of loss capped at $500,000 policy limit = 10%

Calculate the exposure factor for a $750,000 xs $250,000 treaty covering underlying policies with $500,000 limits.

Solution:

Exposure Factor =
(E[x; 500,000] - E[x; 250,000 / 1.1]) / (E[x; 500,000])

= (E[x; 500,000] - E[x; 227,273]) / (E[x; 500,000])

(316,228 - 184,547) / 316,228 = 0.4164
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