Fall 2015 Q14 A
Please feel free to move this to another location is Fisher visualization is not the correct place.
When calculating the LDD premium we have to find the Insurance charge which is 12.5. I want to understand the concept of the insurance charge. If they tell us that the distribution of losses when limited why do we need to account for the insurance charge at all? Isn't having the limited distribution already accounting for the 300,000 deductible?
Also from a policyholder perspective what does this charge cover? For example I know the what every other component of their premium is for such as loss and alae, commission, fixed expenses, and so on.
Comments
The key here is we're told there is an aggregate loss limit of $300k whereas the limited losses are uniform on [0, 400k]. The insured has a per-occurrence deductible (of an unknown amount, maybe 100k) so the aggregate loss limit means once they've incurred 300k in deductible losses, the insurer takes over again. The insurance charge is the expected cost to the insurer for covering losses in excess of the aggregate deductible. The difference between the expected unlimited loss and the expected limited loss is the expected cost to the insurer of the per-occurrence deductible.