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Difference between an excess and a deductible

Discussion in 'SA3' started by Shillington, Aug 9, 2015.

  1. Shillington

    Shillington Member

    Hi there. This is a very basic question but I don't think that I've ever understood or read a clear explanation of the difference between an excess and a deductible. Can someone please explain the difference?
     
    Shillington, Aug 9, 2015
    #1
  2. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    A deductible basically reduces the maximum payout, but an excess doesn't. Let's see an example:

    Scenario 1: A policy has sum insured 1,000 and excess of 100:

    • If the loss to the insured is 500, the insurer will pay out 400
    • If the loss to the insured is 1,500, the insure will pay out 1,000 (ie the sum insured).

    Scenario 2: A policy has sum insured 1,000 and deductible of 100:

    • If the loss to the insured is 500, the insurer will pay out 400
    • If the loss to the insured is 1,500, the insure will pay out 900 (ie the sum insured less the deductible).
     
    Katherine Young, Aug 13, 2015
    #2
    Hemant Rupani likes this.
  3. Shillington

    Shillington Member

    Thanks for your reply.

    So

    Excess Loss=Min(SI, Max(0, Loss-Excess))
    Deductible Loss=Min(SI-Deductible, Max(0, Loss-Deductible))

    So in your example for all losses up to the SI the two structures have the same recoveries for the insurer but for losses above the SI they have different payments. Which means for the same excess and deductible the coverage under the excess is better and so should have a higher price.

    The deductible definitions seems quite unnatural to me.
     
    Shillington, Aug 14, 2015
    #3
  4. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    Yes that's right. It probably feels unnatural if you're used to thinking about personal lines business (eg your own car insurance). Deductibles are more common in commercial lines.
     
    Katherine Young, Aug 14, 2015
    #4

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