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Expected Reinsurer Deficit


A method of testing reinsurance contracts to determine whether there is actual risk transfer. ERD incorporates the present value underwriting loss severity and loss frequency into a single measure. It is the probability (or frequency) of a reinsurer loss multiplied by the loss size itself, calculated over the entire range of loss outcomes. ERD is more robust than simply looking at the 90th percentile outcome because it takes into consideration all loss outcomes (including those beyond the 90th percentile). While such an approach has not replaced the 10/10 Rule in practice, it has been increasingly used in risk transfer evaluations.

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