Step 5
In the Step 5 wiki question, why is B + CL called the "net deductible premium"? I thought there wasn't a deductible since the insurer is paying all losses (B has XS and L has limited) in the premium. Thanks in advance!
In the Step 5 wiki question, why is B + CL called the "net deductible premium"? I thought there wasn't a deductible since the insurer is paying all losses (B has XS and L has limited) in the premium. Thanks in advance!
Comments
You raise a good point. We looked back through the Fisher text and they don't define "net deductible premium" anywhere but do mention it in their solution to Step5.
In our opinion, it's a terminology thing. B+cL is the premium before taxes and commission are considered. It's net of the deductible in the case of a (large dollar) deductible program and for a retrospectively rated program (as you point out) it reflects the make up of the premium as determined by the per-occurrence and aggregate limits. i.e. it's net of the limits in that the premium reflects the sum of the expected excess loss and the actual ratable loss. I think they just wrote net deductible because net limit premium might be confusing.
The key takeaway here is commission is charged on the entire premium, not just in proportion to ratable losses (if it were included in the loss conversion factor, c), and not treated as a fixed expense (if it was treated as a percent of the expected excess loss).
Thanks! That makes sense.