Fisher.OtherLSPlans

Reading: Fisher, G. et al, "Individual Risk Study Note," CAS Study Note, Version 3, October 2019. Chapter 2. Sections 5 – 10

Synopsis: To follow...

In this article we look at a range of other loss sensitive rating plans that exist in addition to experience and retrospective rating plans.

Study Tips

...your insights... To follow...

Estimated study time: x mins, or y hrs, or n₁-n₂ days, or 1 week,... (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• fact A...
• fact B...

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)
E (2018.Spring #1)

In Plain English!

Large Deductible Plans

Large Dollar Deductible (LDD) rating plans are typically for casualty lines of business which have a per-occurrence deductible of over $100,000. The insurer pays all claims upfront and then bills the insured for deductible reimbursements up to the per-occurrence deductible amount.

Under this type of rating plan, losses subject to the deductible may or may not include ALAE but are subject to a per-occurrence limit. The deductible reimbursement could be capped at an aggregate deductible limit and there is no minimum deductible reimbursement.

Premium is generally fixed for a large dollar deductible plan. However, the insured's cost (premium + loss reimbursements under the deductible) are not fixed. So large dollar deductible plans are loss sensitive as the total cost varies based on the actual loss experience.

The premium doesn't cover losses below the deductible (on a per-occurrence and aggregate basis). The insurer handles all of those claims but bills the insured the full amount. Net premium is the premium less any outstanding deductible payments. Net premium must covered the expected per-occurrence and expected aggregate losses, expenses and an underwriting profit provision.

Key Differences with a Retrospective Rating Plan:

• Provisions for premium tax and some premium based assessments (net of deductible premium) are lower since deductible reimbursements are not premium.
• Commission provision can be lower if it is a percentage of net premium.
• The insured's expected cost is generally lower under a large dollar deductible plan.

As the deductible (or attachment point) grows, the expected excess loss shrinks, so the insured is charged less premium. This means the expense and UW profit provisions can make up a large part of the large dollar deductible premium. The risk load for the excess losses can be material in terms of parameter risk and process variance.

See Fisher.CaseStudy for an example of how to calculate the net premium under a large dollar deductible.