General Insurance

Week 13
Frequency and Severity with Coverage Modification

• Deductibles
• The Loss Elimination Ratio and the Effect of Inflation
for Ordinary
• Policy Limit
• Coinsurance, deductibles and Limits
• The Impact of Deductibles on claim frequency
Review Chapter 3
Review Chapter 3
Deductibles & x -

d,xxY Gxa!s* =

• Insurance policies are often sold with a per-loss deductible of d.

When the loss, x, is at or below d, the insurance pays nothing. When
the loss is above d, the insurance pays x — d
Deductibles
• The per-payment variable and its Key Function

I500

C
*

00
->
Deductibles
• The per-loss variable and its Key Function
 fH) gat
=

F(x) 1 =

1
Deductibles
st Sex) 1
= -
F(x)
• Example -1-11-)) s
=

Determine similar quantities for Pareto distribution with ! = 3, % =

2,000 for an ordinary deductible of 500.

d=500 XPareto (a 3,8 2000 S

=
=

3.25003
ytse
YP +y(y) 250
--
-
4
(y 2500)
=

2003/2500
+

Fr
S4
nur
Deductibles

• Per-loss
Deductibles

• Per-payment
Deductibles
• Example
Determine similar quantities for Pareto distribution with ! = 3, % =
2,000 for an franchise deductible of 500.
Deductibles E((X 144) Sx
=
*
fdx 4(1 7(a)
+ -

-E(xed) 1x
=

+ dx

d(1 4(a)
+
-

--
Deductibles ElYY ECYD
• Example
Determine the four expectations for the Pareto distribution with α =
3, θ = 2,000 for an franchise deductible of 500.
-
·
E(x)

· E(X1d) =---?

·
F(d) = ....
 G
x L0

Fx(x) =

-000001X
10.32 X7,0

Find
tu, Fyp, Su, hyp ordinary
tible
dece

of5000

E(Y), E(YY
The Loss Elimination Ratio and
The Effect of Inflation for Ordinary Deductibles
Policy Limits
• The typical policy limit arises in a contract where for losses below u
the insurance pays the full loss but for losses above u the insurance
pays only u.
• The effect of the limit is to produce a right censored random variable.
It will have a mixed distribution with distribution and density function
given by (where Y is the random variable after the limit has been
imposed)
Policy Limits
Coinsurance, Deductibles and Limits
• In this case the insurance company pays a proportion, α, of the loss
and the policyholder pays the remaining fraction.

• * = !+
Coinsurance, Deductibles and Limits
• When all four items (ordinary deductible, limit, coinsurance, and
inflation), we create the following per-loss random variable:
Coinsurance, Deductibles and Limits
Coinsurance, Deductibles and Limits
Coinsurance, Deductibles and Limits