Thank you for your response. I am very aware of the program you have
implemented.
Actually, my issue is not with the discounting of the insurance charge
itself(like you said it is not a big issue now) but rather the
underlying parameters that was used in our(your?)aggregate loss
distribution function. In order to validate these assumptions in the
aggregate loss distribution function, I have constructed an aggregate
loss distribution functions implied by Table M and compare it to the one
currently use. For unlimited loss limit, two aggregate loss
distribution functions seem to follow each other fairly close except at
the extreme(high and low) entry ratios. This seems to be due to the
nature of the distribution function used and there is nothing I can do
to make it fit better. If I make it fits better at the low entry ratio,
its fit at the high entry ratio will get worse and vice versa.
I think at the extreme entry ratios, it is probably not a good idea to
use any loss distribution function to fit the aggregate loss
distribution(because it doesn't fit well at either very high and very
low end). Instead, values from table M should be used. However,
insurance charge generated from table M is not discounted which is what
I am trying to accomplish. Thus, to sum up my question in one sentence:
How to reflect time value of money using table M?
---Yin Lawn
----------
From: Meyers, Glenn G.
To: 'Lawn,Yin'
Cc: 'casnet@lists.casact.org'
Subject: RE: Discounting insurance charge in Table M
Date: Monday, June 29, 1998 8:01AM
Yin:
This was a big problem in the early eighties when interest rates were in
the stratosphere. So called "paid loss retros" were common and it seem
that since you get the retrospective premium later, you ought to charge
more for the contract.
I addressed this problem by calculating an aggregate loss distribution
at various settlement lags and calculated the expected retrospective
premium at each lag. With this, you can calculate the present value of
the retrospective premium, and adjust your insurance charge (or other
plan factor) to get you the "right" present value.
I wrote up this in a paper titled "The Cash Flow of a Retrospective
Rating Plan" which was published in the PCAS around 1986.
I was actually working for your company when I implemented this and I
believe a PC version of these ideas is still being run by Brian
Montigney.
Glenn Meyers
Insurance Services Office, Inc.
Internet: gmeyers@iso.com
Voice:(212) 898-5938
Fax: (212) 898-6060
----------
From: Lawn,Yin [SMTP:Yin.Lawn@cna.com]
Sent: Friday, June 26, 1998 4:58 PM
To: casnet@lists.casact.org
Subject: Discounting insurance charge in Table M
Hi,
Does any body have any ideas(or articles and papers)on how to
discount
insurance charge for time value of money? I don't think current
table M
reflects time value of money associated with insurance charge.
Is there
anyway to modify current procedure to obtain a discounted excess
loss
ratio from table M? Maybe a formula for shifting column just for
insurance charge discounting? Thanks.
---Yin Lawn
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