RE: Excess Policyholder Deficit Examples

Ruhm, David ( (no email) )
Thu, 7 Jan 1999 11:44:57 -0500

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Consider a $1,000,000 loss having 99% probability (1% probability of zero
loss). Expected loss equals $990,000. Let assets equal $980,000 which
means surplus is ($10,000) which is less than zero. The EPD is 99% x
$20,000 = $19,800. The EPD ratio is EPD / Expected Loss = 19,800 / 990,000
= 2%, which is less than a 5% criterion. To lower the EPD ratio even
further, just increase the probability of loss toward 100% and move the
assets closer to the expected loss. (Not a realistic example, as Glenn
pointed out, but it does the job.) - David Ruhm

> -----Original Message-----
> From: Richard A. Derrig [SMTP:rad@shore.net]
> Sent: Thursday, January 07, 1999 11:28 AM
> To: Meyers, Glenn G.
> Cc: casnet@lists.casact.org
> Subject: RE: Excess Policyholder Deficit Examples
>
> Glenn: Where do I go wrong? Is not the EPD in the case of a fixed loss L
> (fully funded by a risk-free security) zero? If funding is a variable then
> EPD should be positive if default risk is non-zero.
>
> Richard A. Derrig, Ph.D.
> Senior Vice President, Auto Insurers Bureau
> 101 Arch Street
> Boston, MA 02110
> Phone: (617) 439-4542
> Fax: (617) 439-6789
> Email: rad@shore.net
>
> > -----Original Message-----
> > From: Meyers, Glenn G. [mailto:GMeyers@iso.com]
> > Sent: Tuesday, January 05, 1999 9:27 AM
> > To: 'CASNet'
> > Subject: Excess Policyholder Deficit Examples
> >
> >
> > Yesterday's posting yielded a large number of both private and public
> > responses. I would like to think a bit before I react to them. (This
> is
> > one reason why I like e-mail discussions.)
> >
> > I did receive a request for some EPD examples. This I can provide now.
> > Attached is an Excel 97 spreadsheet I created for this purpose. It uses
> > macros with Solver to calculate the surplus implied by the probability
> of
> > ruin criteria, and by the EPD criteria.
> >
> > <<Gamma Example for CASNET.xls>>
> >
> > A single point mass provides the ultimate example. Suppose an
> > insurer as a
> > fixed loss L. Then the EPD for a surplus of -p*L is p.
> >
> > Glenn Meyers
> > Insurance Services Office, Inc.
> > Internet: gmeyers@iso.com <mailto:gmeyers@iso.com>
> > Voice:(212) 898-5938
> > Fax: (212) 898-6060
> >
> >
> >
>
>
>
> Visit the CAS Web Site at http://www.casact.org
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RE: Excess Policyholder Deficit Examples

Consider a =$1,000,000 loss having 99% probability (1% probability of zero =loss).  Expected loss equals $990,000.  Let assets equal =$980,000 which means surplus is ($10,000) which is less than =zero.  The EPD is 99% x $20,000  =3D $19,800.  The EPD =ratio is EPD / Expected Loss =3D 19,800 / 990,000 =3D 2%, which is less =than a 5% criterion.  To lower the EPD ratio even further, just =increase the probability of loss toward 100% and move the assets closer =to the expected loss.  (Not a realistic example, as Glenn pointed =out, but it does the job.) - David Ruhm

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