Insurance companies are now encouraged by regulation to perform assessment of their own risk exposure. Monte Carlo simulation, and particularly @RISK are extremely useful in performing assessments that can be used not only to satisfy regulators, but also to improve financial risk management within the company.
Waszink Actuarial Advisory in collaboration with Palisade's Custom Development Team created this Catastrophe and Large Loss Simulation Model to provide an output that includes the aggregate loss gross and net of reinsurance, and the reinsured loss.
In this example, an application was created using @RISK to generate the aggregate loss resulting from multiple large or catastrophic losses occurring within a given period of time. Aggregate losses are determined gross and net of any Excess of Loss Reinsurance.
Parametric distributions for frequency and severity of loss gross of reinsurance must be specified by the user. Frequency and severity are assumed to be mutually independent.
In addition, the user can specify an Excess of Loss Reinsurance program. The following features of the reinsurance program must be specified:
- Number of layers
- Limit and retention by layer
- Reinsurance premium by layer
- Number of reinstatements by layer;
- Reinstatement premium as percentage of reinsurance premium
The output includes the aggregate loss gross and net of reinsurance, and the reinsured loss.
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