Lee1 - The math of XOL coverages & retro rating 1: Exp. Rating

Question 1

Advantages and disadvantages of layer method

Answer 1

Advantages:

1. when distribution is given numerically, G(x) usually does not pose a problem
2. Retro rating table M & L are constructed by layer method

Disadvantage:
G(x) is generally more difficult to integrate

Question 2

Explain why ILFs must increase at a decreasing rate.

Answer 2

Divide loss into layers of equal width. Expected payment in any layer is less than the expected payment in the previous layer. Loss must penetrate a lower limit before reaching a upper limit.