Largest Claims Reinsurance (LCR). A Quick Method to Calculate LCR-Risk Rates from Excess of Loss Risk Rates

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Abstract
Let us denote by E(x) the pure risk premium of an unlimited excess cover with the retention x and by H(x) and m(x) the corresponding expected frequency and severity.We thus have E(x) = H(x) · m(x).H(x) is a non-increasing function of x and for practical purposes we can assume that it is decreasing; H′(x) < o. The equation H(x) = n has then only one solution xn, where n is a fixed integer.Let En denote the risk premium for a reinsurance covering the n largest claims from the bottom.Let us define Intuitively we feel that is a good approximation for En.We shall first show that when the claims size distribution is Pareto and the number of claims is Poisson distributed, is a good approximation for En, being slightly on the safe side. We further include a proof given by G. Ottaviani that the inequality always holds.In the Pareto case we havewhere the Poisson parameter t stands for the expected number of claims in excess of 1 (equal to a suitably chosen monetary unit) and.

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