Fall 2016 #15
In part a sample 3, why is the credit risk load a % of standard prem? I would have expected it to be a % of expected limited loss since the credit risk is for < deductible on Large Deductible since the insurer pays it first then seeks reimbursement.
Comments
I don't have a great answer for this. The Fisher text doesn't specify a basis for credit risk. I think in the exam you should be told what it's a percentage of and just go with it. If it's not clear then stating you assume it's a percent of standard premium is probably best.
I suspect the logic for being a percent of standard premium is it's easier to track the amount of write-off and compare it to the standard premium than it is to have to dig into the details for each risk to figure out what their expected limited loss was. This is particularly the case when there's an aggregate limit as well because then you're needing to restrict the expected limited loss further.