Reinarz Chapter 10

chris.tait@milliman.com
Wed, 25 Feb 1998 5:57:59 -0800

Three methods for pricing a facultative buffer contract are shown on pages=20
102-105=2E On page 105 it says, "=2E=2E=2Ethe premium calculated for this=20=
layer using=20
the manual excess method is too low, since it covers indemnity loss coverag=
e=20
only (the ALAE was assumed to be covered completely by the basic limit=20
premium)=2E" However, on page 104, in the paragraph titled "Assumptions in=
the=20
Manual Excess Methods", it says, "Since the ISO ILF's contain no ALAE provi=
sion=20
for the layer=2E=2E=2Ethe third assumption is that part of the risk and con=
tingency=20
loading built into the factors can also cover the excess pro rata ALAE=2E"

Which statement is correct? The RELC calculation has an explicit loading f=
or=20
ALAE, but uses ILF's without risk load=2E The two manual excess methods do=
not=20
have explicit loadings for ALAE, but use ILF's with risk load=2E

The first question on the 1992 Part 10 exam contained the following stateme=
nt,=20
"Excess premium based on manual premium and differences between ISO ILF's=20
contains a reasonable industry loading for ALAE when ALAE is covered=20
proportionately to the excess indemnity=2E" According to the study manual,=
the=20
answer to that statement is false=2E

In a real-world pricing situation, I wouldn't assume that the risk loading=20=
in=20
ISO ILF's is sufficient to cover pro-rata ALAE on an excess contract=2E Ho=
wever,=20
I'm not sure how to answer an exam question on the subject=2E Any thoughts=
?

Chris Tait