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Sep 2006 Q2(ii)

L

lwang

Member
This is the gap insurance question. I don't understand examiner's report "Economic conditions impacting on market values of vehicles and therefore severity of claims for gap insurance are leveraged. For example, a 5% increase in depreciation value has a greater than 5% increase in claim severity. "

I thought the depreciation value is the claim severity/costs. Where does the gearing effect come from?

Thanks in advance!
 
The claim severity will generally be the gap between the market value of the car and the loan value. But if the economy is doing badly, then market values may be even lower, and people might borrow more, so the gap is even bigger.
 
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