Section 7 : Large accounts Flashcards
What’s the difference between deductibles in property vs liability insurance?
In property, it reduces the claim; in liability, the insurer pays the full amount and seeks reimbursement from the insured.
What is a per-event deductible?
Applied per claim or per occurrence, depending on policy terms.
What is a time deductible (aka waiting period)?
A delay between the event and when coverage begins (e.g., business interruption).
What’s an aggregate deductible?
A deductible applied collectively to all claims over a policy term.
What is a disappearing deductible?
A deductible that reduces as claim size increases, mixing straight and franchise features.
Why do deductible savings level off as deductible increases?
Because most small claims are already removed; larger deductibles yield smaller marginal savings.
What’s a deductible factor?
A multiplier to adjust premium based on the deductible level chosen.
What’s the goal of a deductible consistency test?
To ensure marginal rate decreases as deductibles increase.
What’s the key difference between SIR and Large Deductible?
Under SIR, insurer is not involved below threshold; with large deductible, insurer is always involved.
Does SIR affect policy limits?
No, losses under the SIR do not erode policy limits.
Do insurers pay claims under large deductible policies?
Yes, they pay and then bill the insured for indemnity and ALAE.
What is replacement cost coverage?
Payment without depreciation.
What are the 3 Actual Cash Value (ACV) methods?
- Replacement cost minus depreciation
- Fair market value
– What someone would reasonably pay for it today - Broad evidence rule
– All relevant info (income value, replacement, market trends, etc.)
What does ILF = LAS(limit) / LAS(base) mean?
It calculates the relativity of severity at a higher limit compared to the base.
What’s the consistency test for ILFs?
Marginal premium per $1,000 should decrease as limits increase.
What is LAS?
Limited Average Severity—the average of capped losses at a given limit.
Why can’t you use 50K policy data to estimate 50–100K LAS?
Because losses above 50K are capped and unobservable in that dataset.
What are common assumptions in ILF calculation?
Frequency is independent of severity and policy limit; all expenses are variable.
What’s the source of ground-up data?
Closed claims with full loss info, before any deductible or limit.
What is a self-insurance fund?
A fund used to finance retained losses without insurer involvement.
What’s a captive insurer?
An insurance company owned by its insureds to finance their own risk.
What’s the goal of pooling in self-insurance?
To share and manage risks among similar participants.
Why do entities choose self-insurance?
For cost effectiveness, control, risk management, and reinsurer access.
How does self-insurance help with risk management?
Encourages proactive risk control and better claims handling.
How is risk allocated in self-insurance funding?
Based on actual claims and exposures.
What is the main benefit of captives vs other self-insurance methods?
More formal and disciplined due to regulation and audit requirements.
What’s one way to enhance stability in allocations? (Funding allocations)
Cap large claims or use longer experience periods.
What’s tested during funding allocation sensitivity testing?
The effect of changing assumptions on allocation results.
What is a composite rate?
A premium per unit exposure accounting for all coverages and adjustments.
What data is used in composite rating?
Ultimate trended losses and expected loss ratios.
Why are small claims often discouraged by insurers?
They drive up loss adjustment expenses (ALAE) more than loss payments.
Why might a company limit deductible credits?
To avoid situations where reducing a deductible saves more than it costs.
What is schedule rating?
A method where manual premiums are adjusted up or down based on specific risk characteristics, using fixed credit/debit percentages.
What is judgment rating?
A method where the underwriter adjusts the rate based on professional judgment, especially when statistical data is limited.
How does Ontario’s MAP program rate small insureds?
Based on claim count, not claim cost.
0 claims = ↓ premium 1 claim = no change 2+ claims = ↑ premium
What are the WSIB surcharge rules in MAP?
Each claim > $5,000 = 10% surcharge
Fatality = 25%
Max total surcharge = 50%
What should you do if ILFs do not decrease smoothly?
Adjust them to enforce a monotonic (always increasing) structure for consistency.
What real-world factors can affect ILFs?
Tort reform, changes in claim settlement behavior, and technological advancements.
What 3 key assumptions are needed for designing a funding allocation system?
- Length of experience period
- Whether to use claims or counts
- Credibility factors
What two principles should guide self-insured funding systems?
Stability (limit large swings year to year)
Simplicity (easy to explain and apply)
