Deductible Leveraging

[Flying Squirrel]

I am working on a paper to explain deductible leveraging to some non-actuary types. I understand the topic, plan on giving examples of how it works, but since I am still a student, I would like to backup my proof with references from a qualified actuary. Where can I find a SOA book, whitepaper, etc. written by an actuary that also explains this topic?

[Don Quijote]

There is a very brief description in the Group Insurance text edited by Bluhm, which used to be on the SOA syllabus. It focuses on the effect on stop-loss coverages but references the deductible effect at the individual level as well. Perhaps someone else can give you a more detailed reference.

[Brad Spirrison]

There is are 2 study notes on the exam I recently took that address the issue of deductible leveraging as a subtopic. One is
SN 8GM-100 from courses 8G & 8M. It discusses deductible leveraging in Medicare. Another study note is SN 8G-602 from course 8G. It discusses deductible leveraging with regards to stoploss coverage.

[Double High C]

Certainly you can find papers on e.g. long-tailed probability distributions and their use in pricing and projecting stoploss / high deductible claims.

However, it seems to me that if you are explaining the concept to "non-actuarial types", your intent is not to get into a theoretical discussion, but rather just to give them a feel for the overall potential relative fluctuation in experience (i.e. in loss ratios).

(Certainly, most would understand why it is risky to borrow money to invest. While you probably want most of your examples to be directly related to your topic, deductible leveraging is analogous to your topic and might help your audience to relate.)

Therefore, it seems that simple examples would be best, and you can probably come up with better ones for your purposes than e.g. someone trying to come up with a good exam question (or perhaps something used by an academician or actuary to apply risk theory concepts to real world situations).

However, if your audience is more technically inclined (and really does want to see the "math stuff"), then perhaps you should include some more theoretical examples stuff in your presentation.

[Anonymous]

Deductible Leveraging Example
2000 Claim allowance = $1000
2000 Deductible = $250
Company liabilities = $750
Projected Trend 15%
2001 Claim allowance = $1150
2001 Deductible = $250
Company liabilities = $900

Actual increase in liabilities = 900/750-1 = 20%

[JMO Fan]

Tom Foley of the Kansas Department wrote an article a few years ago on loss ratios which may be helpful. (He may have been with the North Dakota Department at the time.) I think it was in the SoA Actuary; if you can't find it, you could try calling him.

[Patience]

From: Kathleen Sebelius
Sent: Tuesday, November 20, 2001 5:50 PM
To: Kansas Insurance Department
Subject: change

As we approach the end of the year, we have a change pending at the Kansas
Insurance Department. Tom Foley will be resigning as Director of the
Accident and Health Division as of December 1st, and Jay Rogers will be
appointed to take his place.

Tom has finally persuaded me that he has been a regulator for just enough
time, and has plenty of other interests (like GOLF) to occupy his time. I am
delighted to report that he will be working with KID on a half-time basis,
as an actuarial consultant on health insurance issues.

Tom has now worked in three state insurance departments - Florida, North
Dakota, and Kansas - and also in the private industry. He has had a
tremendous career looking out for consumer interests and his effort merited
the prestigious Dineen Award, which is given to one state regulator in the
country each year.

I know he is leaving the Department in good hands and have every confidence
that Jay will do a good job in a difficult market. Many thanks to Tom for
his leadership and vision.
Kathleen

[Chris]

I am very happy that Tom Foley is retiring, and wish him well in his retirement and hope that he golfs a lot and keeps his consulting gigs to a minimum.

The article Tom wrote is on the part 8 G sylabus. I don't remember if it had anything about deductible leveraging, but I doubt it, since deductible leveraging would help justify a higher rate increase, and the article was against higher rate increases.

Regarding the original aspect of the post, deductible leveraging. The best way to describe it is by way of example, and this still may not work. If all else fails, you can quote one of the marketing guys in my company when he was trying to explain a higher trend rate on higher deductibles due to deductible leveraging.

He said it was higher.

[Sub_Zero]

http://www.youtube.com/watch?v=KIZUtonBpII

[jerrytuttle]

Back to deductibles:

I would present a simple example, as one of the previous posters did.

As an additional tidbit, it is sometimes true that the characteristics of the population who buy a small deductible are different from the characteristics of the population who buy a large deductible. For example, in automobile collision insurance, 18 year olds in seven year old Toyotas are probably buying small deductibles, while 50 year olds in new Lexuses are probably buying larger deductibles.