[[Actuarial Notes Wiki|Wiki]] / [[Exam 5 (CAS)]] / **Large Loss Capping** ## Definition ==Large Loss Capping== is a ratemaking technique where individual losses above a specified threshold are limited (capped) to that threshold amount to reduce volatility in the experience data. ## Methodology ``` For each claim: Capped Loss = MIN(Actual Loss, Cap Amount) Example: Actual losses: $50K, $200K, $450K Cap at: $250K Capped: $50K, $200K, $250K ``` ## Selecting Cap Level - Policy limits - Reinsurance attachment point - Statistical analysis (percentiles) - Judgment based on credibility - Historical loss distribution ## Adjustments ``` Must adjust for capping: - Reduce expected losses to capped level - Adjust exposures if representing limited coverage - May need separate provision for excess ``` ## Related Concepts - [[Large Loss#Definition]] - [[Large Loss Exclusion#Definition]] ## References - Werner & Modlin, Chapter 9