2012 Q15(a)
I am confused by the formula we should use for this question.
In the chapter note, for excess claims/severity, the impact of inflation formula shows as below:
However, in the answer of 2012, Q15(a):
the increase in excess losses due to inflation is calculated as :
The last item in the first equate is missing, (1-Fx(A))/(1-Fx(A/t). Could you please explain why?
I understand for aggregate excess loss, the formula would not include the last item, because it has been offset by inflation impact of claim counts. How can I tell if the question is asking me to calculation inflation impact on excess severity or aggregate excess loss?
Comments
This is tricky and the CAS may not always make it clear so be sure to state your assumptions.
This question asks for the average increase in excess loss which implies it is the aggregate loss amount we're interested in. Had it said excess claims or excess claim severity then, as you say, we'd use the other formula.
Potentially, if you had time, you could hedge your bets and show both the average excess claim severity inflation and the average excess loss inflation. If both were clearly labeled, the CAS may assume you're showing intermediate steps and still grant you full credit.
Thank you! I got it.