Pricing Casualty Excess Reinsurance: Discounted Expected L&LE

In developing an estimated price for casualty excess of loss reinsurance contracts, it is not uncommon to adjust the expected loss component of the rate to reflect the estimated value of investment income on funds held to pay outstanding loss reserves. The discount rate is generally a function of 1) a projected payment pattern for losses and loss adjustment expenses (L&LE), and 2) a specified interest rate. While, for many excess reinsurance contracts, it may be difficult to accurately project L&LE payments over time, the mechanics of the technique are fairly straightforward. An example of its application to a workers compensation excess program is provided in Appendix A. Keywords: Reinsurance Research - Pricing/Contract Design