Mini Battle Quiz 4 Earthquake Reserve
From the MCT source it says Formula 1: Countrywide PML = (WC PML^1.5+EC PML^1.5)^(1/1.5). It also states that:
"Insurers should use the following standard formula for calculating their PML if:
- The insurer does not use an earthquake model for calculating its PML, or
- An earthquake risk exposure estimation technique is not to OSFI's satisfaction "
And then it gives the standard formula (call it formula 2) of Countrywide PML = MAX(PTIV WC - applicable deductible, PTIV EC - applicable deductible).
This lead me to believe that we first try using Formula 1 and then only if we do not have PML results calculated or our estimation technique is not to OSFI's standards then we should use the standard approach (formula 2)
It looks like what mini battle quiz 4 is doing is taking the countrywide PML as MAX(Formula 1, Formula 2) which is different form my understanding of the source. Am I interpreting this wrong?
Comments
Are you talking about the randomly generated calculation problem? I am not seeing what you are seeing - All that problem is doing is calculating the ERC using the 2 different approaches (model and standard). I do not see a max(formula 1, formula 2)
Oops looking back now I misinterpreted the solution being given