Part III

(2) Discount Formula for Deductible Coverage

After k is obtained, assumptions regarding expenses must be made before the discount can be determined.

The usual assumptions made with respect to deductible coverage for liability insurance are:

The provisions for acquisition, taxes and profit (A, T, p) vary with premium.

The provision for all other expenses (e, n) are fixed %'s of full coverage premium.

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Formulas:

P = EP + nP + (A+T+p)P
P = (E-a)P + eP + (A+T+p)P 

P' =(1-fk)(E-a)P + eP + (A+T+p)P'    

(4) Higher Optional Deductibles:

Reasons for increased interest in the 80's and 90's for higher deductible coverage:

The trend toward self-insurance. The insured hopes to keep profits and expenses that would otherwise go to the insurer.

Tax savings to the employer resulting from the ability to deduct a liability for the insurance deductible on an unpaid claim (otherwise, deductibility of the loss reserve on an unpaid claim may not be possible.

Positive cash flow to the insurer (the excess claim may not have to be paid for a number of years after the policy is written).

Reduction of assessments, from lines with residual market pools, since the basis for such assessment will be smaller (excess written premium only). The LERs for such deductibles have been calculated using data underlying the calculation of ELFs.

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