2015 spring 14

daviddavid
in W-11-SpecialClassification

In part (b), are we supposed to interpret the $1000 deductible as being applied after the policy limit of $3000 is applied? The examiner's report seems to imply this, but I don't see how this interpretation leads to the calculation outlined in the answers. Could you please explain? Thank you.

Comments

  • GrahamGraham

    The way I did this problem is to apply the 1,000 first, then the 3,000 policy limit. The 3,000 policy limit refers to the actual amount the insurer pays out.

    The loss eliminated due to the deductible is:

    • 75,000 + (117 x 1,000) + (3 x 1,000)
    • = 75,000 + (120 x 1,000)
    • = 195,000

    That's the first part of the calculation. Note that none of the claims in the first 2 rows in the table would exceed the 3,000 policy limit (because all those claims are less than 4,000 and there is a 1,000 deductible so the maximum payout is 3,000 anyway.)

    The second part of the solution is calculating how much loss is eliminated due to the 3,000 policy limit. This limit will only apply to the 3 claims above 4,000:

    Claim 1: 5,500

    • Apply the 1,000 deductible so the insurer would pay out only 4,500.
    • But there is a 3,000 policy limit so the insurer doesn't pay the remaining 1,500

    Claim 2: 6,500

    • Apply the 1,000 deductible so the insurer would pay out only 5,500.
    • But there is a 3,000 policy limit so the insurer doesn't pay the remaining 2,500

    Claim 3: 10,000

    • Apply the 1,000 deductible so the insurer would pay out only 9,000.
    • But there is a 3,000 policy limit so the insurer doesn't pay the remaining 6,000

    So the total loss eliminated is:

    • 195,000 + 1,500 + 2,500 + 6,000
    • = 205,000

    Hope that answers your question.

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