Section B_4 - Loss Sensative

Question 1

Gillam and Snader 3 ***

Reasons Interest in Higher Deductible

Coverage has Grown (4)

Answer 1

TREND TOWARD SELF INSURANCE:

Insured hopes to keep profits and expenses that would go to insurer otherwise

TAX SAVINGS TO EMPLOYER:

An employer in an LDD gets a tax deduction for the unpaid deductible; in a traditional plan they may not be able to deduct the unpaid loss reserve

POSITIVE CASH FLOW TO INSURER:

Excess claims may not have to be paid for a number of years after the policy is written.

REDUCTION OF ASSESSMENTS:

The reduced premium of deductible coverage (compared to full coverage) results in reduced premium-based assessments for residual market pools

Question 2

Gillam and Snader **

Assumption for Discount calculation in Deduactible plans

Answer 2

Discount is based on assumption that acquisition expenses, taxes and profit are reduced proportional to premium; while other expenses and LAE are not reduced => so we use (E-a)

Question 3

Gillam and Snader *

Why the Entire Medical Pure Premium

is NOT Eliminated in Ex1Med Coverage (3)

Answer 3

1. The selection of ex-medical coverage will likely be ADVERSE TO THE INSURER
2. The PAYMENT of certain medical costs MAY BE REQUIRED even though the policy is ex-medical
3. The INSURER RETAINS an OBLIGATION to pay medical loss in the event the employer is unable to pay

Question 4

Gillam and Snader ***

Overview of Excluding-Medical Coverage

Pricing Assumptions

Answer 4

Defn: Employer assumes laibility for medical payments to injured employees (by endorsment). Usually takes by hospitals.

Pricing Assumption (Insurer’s viewpoint):

1. The ex-medical pure premium is equal to the total pure premium less a portion, for example 80%, of the medical pure premium.
2. While acquisition (A) and taxes (T) are reduced in proportion to the reduction in premium, general expenses, LAE and profit remain the same.