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Vignaud_56001900_2023.pdf
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- There are three basic excess-of-loss (XL) reinsurance pricing techniques to determine the expected losses and hence the premium rates : by experience rating, or the use of historical data, by exposure rating, or a procedure used to calculate the reinsurance exposures together with industry data, and finally by frequency/severity rating, or the development of a stochastic model of the covered risk. During the last decades, both the development of personal computers and the improvement of computing calculation speed have encouraged the development of the latter technique. Few papers deal with the practical aspects of pricing XL treaties thanks to a frequency/severity method. Related actuarial literature are published by Walhin et al., dealing with a cash-flow based model (Walhin et al., 2001). Among the set of variables considered in the pricing techniques, it is clear that inflation and nominal interest rates play a central role. The papers on the subject do not agree on the impacts of macroeconomic rates volatility on XL cover pricing. However they agree that the cedant claims payment pattern and reinsurer capital allocation in a prudential context such as Solvency II are also important factors, despite a scarcity of literature on the matters, and particularly on their impacts on pricing. In this study, we develop a ’building block’ pricing tool coded in R able of capturing the effects of the aforementioned key pricing factors. We propose methods for calibrating and modelling each of these factors within each block of the tool. Each block is presented and thoroughly analyzed. Finally we provide several illustrative examples of the tool and then challenge the positions of papers discussed in literature review.