Basic Limits Losses - Mahler 6.33

During policy year 2010, limits were raised. 30% of insureds bought the coverage at the initial limits (thus 70% bought it at the raised limits during PY 2010). The ILF to go from the first limit to the raised limit is 1.1. Basic limit losses during PY2010 were 60 mill.



In problem A)

PY 2010 basic limit losses at the current coverage level =

60000 x 1.1

since, according to the solution, basic limit losses in 2010 assume the first limit.



In problem B)

It is assumed that basic limit Losses for those who purchased the first limit were only 30% of total basic limit losses in PY 2010 = 30% x 60000.



So in problem A, it's assumed that all PY 2010 basic limit losses assume the first limit. While problem B assumes that only 30% of PY 2010 basic limit losses consist of the first limit.



CONFUSEREDD !



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Using the logic of problem B, I would think the correct answer to problem A would be:



(30% x 60 mill) (1.1 - 1) + 60 million



meaning we only need to apply the ILF to 30% of the 60 mill to get losses at the current level since 70% of policy 2010 losses are expected to be at the current level given that 70% of insureds bought coverage at the current level. I'm disturbed by the fact that we assume one thing in problem A and a different thing in problem B.

Basic Limits Losses - Mahler 6.33