Reserve Deficiency

[jbraun60176]

I have something in my notes that I can't find in the readings right now that just seems counter-intuitive to me.

From the IRIS test 11 (Indicated Reserve Deficiency/ PH Surplus), you will have a greater tendency towards indicating a reserve deficiency if you have:

A. a shift from short tailed lines to long tailed lines

B. a shift from large deductible policies to first dollar

I agree with A, but B seems wrong to me. Does anyone agree/ disagree/ want to explain?

Thanks.

[Streetlight 22]

I don't have a comment about your actual question, but that ratio is actually ratio 13. I'm not sure if knowing that would make a difference on the exam or not though.

[Present Value]

I haven't read the paper so I don't know, but if I were to try and rationalize it -
Because a large deductible policy immunizes the insurer against the uncertainty in the frequency of 0-deductible layer losses. Even if there is a jump in frequency of low dollar claims, since they are still below the deductible they are the insured's liability. If there was no such deductible policy then this increase in frequency of low dollar losses would have to be borne by the insurer and would more likely show up as a reserve deficiency.

[jbraun60176]

I haven't read the paper so I don't know, but if I were to try and rationalize it -
Because a large deductible policy immunizes the insurer against the uncertainty in the frequency of 0-deductible layer losses. Even if there is a jump in frequency of low dollar claims, since they are still below the deductible they are the insured's liability. If there was no such deductible policy then this increase in frequency of low dollar losses would have to be borne by the insurer and would more likely show up as a reserve deficiency.


I think I should have been more specific and written 'you will have a greater tendency towards indicating a reserve deficiency even if reserves are actually sufficient'.

The reserve deficiency is based on loss ratios over the past 2 years.