Deductibles used in frequency severity approach Que 14.1

[jeetenge]

In the solution of Que 14.11of chapter 14, the 5th simulation applies ranking deductible first and since the amt is exhausted NR is not applied. Instead cannot we simply use ranking deductible as 0 and non-ranking as 500 andin the next simulationwe can use the ranking deductible as 1000 and NR as 500.
Also since NR doesnot contribute to the AD cannot we apply NR and the trailing together

 

[Ian Senator]

Our understanding is that the 'norm' is that the Ranking always applies before the Non-ranking. And the Trailing only applies once both the Ranking and Non-ranking have disappeared (ie once the AAD has been triggered, both the Ranking and Non-ranking disappear, and the Trailing takes over).

hope this helps!
Ian

 

[jeetenge]

once the AAD has been triggered, both the Ranking and Non-ranking disappear, and the Trailing takes over.

If I understand you correctly, if AAD is not been triggered and the Aggregate deductible is exhausted then only the Non-ranking deductible will apply to the loss.
For eg: In the question 14.11, the annual aggredate deductible is 160,000 and suppose there is additional Claim of 4000, then the working will be as below:
Claim Amount Ran NR Trailing Loss to Insurer LTI Lim to AAD
6 34815 387 500 0 33929 33929
7 6210 0 500 0 5710 4822
8 4000 0 0 500 3500 0

Please let me know if I am correct.

 

[Ian Senator]

Not quite. Any further losses after loss 7 will have neither a ranking nor a non-ranking deductible applied, since the AAD has already been used up. So loss 7 and any further losses will just have the trailing deductible applied.