7.2 Method 1) Loss Ratio Method

Expected Ultimate lossXS Per Occ limit

\[\begin{equation} P \cdot E \cdot \chi \tag{7.1} \end{equation}\]

• \(P\) = Premium

• \(E\) = Expected ground up loss ratio

• \(\chi\) = Occurrence charge = % of losses above deductible

Expected Ultimate Loss XS Aggregate Limits

\[\begin{equation} P \cdot E \cdot (1-\chi) \cdot \varphi \tag{7.2} \end{equation}\]

• \(\varphi\) = Aggregate charge = % of losses in deductible layer that exceed the aggregate

Remark. \(\chi\) and \(\varphi\) are from industry tables

• Specific to the deductible, aggregate, and size of expected losses

• E.g. From NCCI Table M

These are ultimate loss estimate

Advantages

• Useful when little data is available

• Ties to pricing

• Can include industry experience

Disadvantages

• Ignores actual emergence

• May not properly reflect account characteristics