1. Insurance policy pays for losses left to be paid over a fixed deductible
2. the losses remaining is a deductible credit
LOSS ELIMINATION RATIO (LER)
1. Deductibles relativities are based on Loss Elimination Ratios (LER’s)
2. The LER gives the percentage of losses removed by the deductible.
3. LER = [(Losses <= Deductibles) + (Deductibles * # of Claims >Deductibles)] / Total Losses
4. Deductible credit = [L*(1-LER) + F] / (1 - V)
Note:
F = Fixed expense ratio
V = Variable expense ratio
L = Expected loss ratio
LER = Loss Elimination Ratio
EXAMPLE OF LOSS ELIMINATION RATIO
1.Loss Elimination table via deductibles
Loss Size ($)
|
No of Claims
|
Total Losses ($)
|
Average Loss
|
Losses Net of Deductible ($)
|
||
$100
|
$200
|
$500
|
||||
0 to 100
|
500
|
30,000
|
60
|
0
|
0
|
0
|
101 to 200
|
350
|
54,250
|
155
|
19,250
|
0
|
0
|
201 to 500
|
550
|
182,625
|
332
|
127,625
|
72,625
|
0
|
> 501
|
335
|
375,125
|
1120
|
341,625
|
308,125
|
207,625
|
Total
|
1,735
|
642,000
|
370
|
488,500
|
380,750
|
207,625
|
Loss Eliminated
|
153,500
|
261,250
|
434,375
|
|||
L.E.R.
|
0.239
|
0.407
|
0.677
|
|||
Note : Assuming expected loss ratio at 61.4%, Total Fixed Costs is at 13.3% and Total Variable Costs is at 25.3%
2. Calculating deductible credit factor
Deductible
|
Calculation
|
Factor
|
$100
|
(.614)*(1-.239) + .133
|
0.804
|
(1-.253)
|
||
$200
|
(.614)*(1-.407) + .133
|
0.665
|
(1-.253)
|
||
$500
|
(.614)*(1-.677) + .133
|
0.444
|
(1-.253)
|
