You want to adapt the risk-costing process introduced in Section 6.2 so that it works for experience rating of excess-of-loss reinsurance of a liability portfolio, such as employers’ liability

a. Which feature would you need to add so that this process is adequate to deal with the indexation clause, and why?

Another feature that changes in the case of an XL reinsurance treaty has to do with the individual claims data provided: typically, only claims above a certain threshold R are reported to the reinsurer.

Assume that a reinsurer is pricing a £4M xs £1M layer for an XL employers’

liability treaty for a losses occurring annual policy starting 1 January 2013. The reinsurer asks for all losses that occurred over a period of 10 years (let us say, from 1 January 2003 until the data collation date), and estimates a large-loss claims inflation of 10%.

b. Propose an acceptable reporting threshold, and explain your reasoning.