Non-ranking deductibes

Discussion in 'SP8' started by Nicholas.Campbell, Apr 21, 2018.

  1. Hello,

    I'm confused about non-ranking deductibles, in exam ST8 Oct 2015 Qu9, the non-ranking deductibles are recoverable?

    I figured a 'non-ranking dedutible' is: (1) a deductible, and (2) non-ranking!

    Hence:
    Loss A is not in layer, so 0 recovery
    Loss B has $15m in the layer, $14m after the NRD (applied to the FIRST $1m), contribution towards AAD is $14m, recovery is 0
    Loss C has $15m in the layer, $14m after the NRD, contribution towards AAD is $1m, recovery is $13m
    All other losses in the layer are recoverable since AAD is exhausted, so total recoveries = 13+4+2= £22m?

    In 14.13 of the acted notes, the NRD is NOT recovered?

    Thanks,

    Nick
     
  2. Uroš

    Uroš Member

  3. I think the confusion comes from the precise wording in each case. The Core Reading (Chapter 14 Section 1.6) states that:
    • ‘the non-ranking component of a deductible does not contribute to an insured’s aggregate deductible.’
    In this case, the implication is that it is a ‘component’ of a deductible, ie this part of a loss can’t be recovered from the insurer.

    The wording of September 2015 Question 9 is that:
    • part of each claim is ‘non-ranking towards the deductible’.
    The implication is that this is not a component of the deductible, so it can be recovered from the insurer (or in this case the reinsurer).

    I think this was a really tough question, and many people were caught out on the day. Similarly in practice, the precise wording of each arrangement can have a significant impact on the claims experience.

    To illustrate the point, Question 14.13 of the Course Notes doesn’t tell you which order to apply the ranking and non-ranking deductible. The solution applies the ranking deductible first, but this is just one interpretation. The opposite interpretation (ie applying the non-ranking deductible first) would give a different result.

    So what’s the moral of the story?

    As a general strategy you should:
    • read the exact wording of the question carefully
    • state your assumptions explicitly
    • show your workings clearly.
    Hopefully this should be enough to score well, even if you don’t follow the same method as the examiners.
     
    padasala likes this.
  4. padasala

    padasala Ton up Member

    lol @ the circular reference

    This thread references a thread which in turn references back to this thread
     

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