This is in the Reinsurance Products 2 Chapter, page 20 I just want to know where or how this fits in, in the big picture. I get that it's the expected severity as you increase the limit for loss, as a multiple of the expected severity using a lower limit (assuming frequencies are the same at both limits). So I'd just like to know what these factors are used for in XL reinsurance, or simply why there is a small section on these in the notes. I assume it's more useful in pricing, so the insurer can optimise its cover based on premiums charged for the levels?
Yes, you're right. ILFs can be useful to price higher layers (where there's little or no claims experience), by 'grossing up' prices from lower layers. There's not much in the ST7 notes, as there's loads in the ST8 notes (and in the ST8 exam), and it's more of a pricing tool than a reserving tool.
IIRC your previous post was about Original Loss Curves, which are basically the same concept as ILFs. If it's raising questions in your mind every time you encounter them, it might be worth having a look at ST8 Chapter 15 before you continue. It's quite accessible and not heavily dependent on having read a lot of material in between.
