Deductibles

[DanielleN]

Can someone please explain why a lower deductible will lead to a shorter claim development pattern? I thought lower deductibles meant insurers pay more of the claims, and larger claims are more likely to be disputed?

 

[td290]

Can someone please explain why a lower deductible will lead to a shorter claim development pattern? I thought lower deductibles meant insurers pay more of the claims, and larger claims are more likely to be disputed?

Even with a high deductible the insurer will still have to pay out on large claims. A lower deductible will mean the insurer pays out more of the smaller claims, which tend to settle more quickly. Therefore the claims development pattern, which represents some sort of weighted average of the insurer's overall claims experience, will be shorter.

 

[CAKABOGU23]

Hey,

You read my mind - chapter 15! Was just going to ask the exact same question

 

[CAKABOGU23]

Even with a high deductible the insurer will still have to pay out on large claims. A lower deductible will mean the insurer pays out more of the smaller claims, which tend to settle more quickly. Therefore the claims development pattern, which represents some sort of weighted average of the insurer's overall claims experience, will be shorter.

Please, I don't get you

 

[DanielleN]

Thanks td290 for the explanation.

Cakabogu23, if I've understood correctly... A lower deductible will apply to both large and small claims, whereas a high deductible would mean the insurer only really pays towards large claims. Large claims tend to have a longer development pattern, so when you start to pay towards more smaller claims as well this shortens the development pattern overall. Think of the development pattern overall as a weighted average of the individual claim development patterns.

 

[ProCyclist]

thanks td290!

 

[Sherwin]

Besides the qualitative reasons, there are also some quantitative causes.

For instance, a loss occurred in the first quarter and the amount was estimated at £50K initially. In the second quarter the amount was re-estimated at £80K, and in the third quarter it developed to £100K. So the quarter-to-quarter loss development factors were 1.6 and 1.25.

If there was a deductible of £20K, then the quarterly loss amount would be £30K, £60K and £80K. As well, the quarter-to-quarter loss development factors were 2.0 and 1.333.

If the deductible was £40K rather than £20K, then the quarterly loss amount would be £10K, £40K and £60K. Meanwhile, the quarter-to-quarter loss development factors were 4.0 and 1.5, correspondingly.

So you can see what happened to the development factors.