Deductible Recovery

Study guide: Exam 5

Deductible Recovery is the amount an insurer bills back to a policyholder for claim payments it advanced within that policyholder's deductible. It arises in large-deductible programmes, where the insurer pays claims in full — for statutory, licensing and claims-control reasons — and then reimburses itself from the insured.

$\text{Recovery} = \min\!\left(X,\; d\right) \text{ per occurrence}$

$\text{Net Loss} = \text{Gross Paid} - \text{Collected Recoveries}$

Economically a large deductible resembles a self-insured retention, but the mechanics differ: under an SIR the insured pays its own claims and the insurer's limit sits above the retention; under a large deductible the insurer pays ground-up and collects afterwards.
That difference creates credit risk. The insurer has already paid the claimant; if the insured becomes insolvent before reimbursing, the shortfall is a retained loss. Programmes are therefore collateralized — letters of credit, trusts, surety — sized off the actuarial estimate of unpaid recoveries.
Recoveries must be estimated and developed on their own, like salvage and subrogation: billing lags payment, and the recovery pattern is a function of the deductible level and the size-of-loss distribution, not of the loss pattern.
The insurer reserves gross and carries the expected recoveries as an offsetting asset, discounted for expected uncollectibility. Reporting net without disclosing the gross figure hides the credit exposure.
Because the deductible erodes with inflation, the recoverable share of a growing loss falls over time — the same leverage that affects deductible pricing, working here on the balance sheet.

Recovery on a Single Claim A workers compensation policy carries a $\$250{,}000$ per-occurrence deductible. The insurer pays a $\$400{,}000$ claim in full and bills the insured.

State the gross loss, the recovery and the net loss, and the effect if the insured pays only $\$200{,}000$ before failing.
Answer
 $\begin{align*} \text{Gross paid} &= \$400{,}000 \\ \text{Recovery due} &= \min(\$400{,}000,\; \$250{,}000) = \$250{,}000 \\ \text{Net loss} &= \$150{,}000 \end{align*}$ 
If only $\$200{,}000$ is collected:

$\text{Net loss} = \$400{,}000 - \$200{,}000 = \$200{,}000$

The $\$50{,}000$ shortfall is written off as uncollectible. Note that the insurer's underwriting result on this account was never intended to include the deductible layer at all — the whole $\$50{,}000$ is credit loss, not claim experience, and the collateral held against the programme is what is supposed to prevent it.

Reserving a Large-Deductible Programme A programme has projected gross ultimate losses of $\$40{,}000{,}000$ and gross paid to date of $\$22{,}000{,}000$ . The deductible structure has historically recovered $62\%$ of gross losses. Recoveries collected to date are $\$12{,}800{,}000$ . Two insureds representing $8\%$ of outstanding recoveries are in financial distress, with collateral covering half their exposure.

State the unpaid claim position.
Answer
 $\begin{align*} \text{Gross unpaid} &= \$40{,}000{,}000 - \$22{,}000{,}000 \\ &= \$18{,}000{,}000 \\[6pt] \text{Ultimate recoveries} &= 0.62 \times \$40{,}000{,}000 \\ &= \$24{,}800{,}000 \\[4pt] \text{Unbilled / uncollected recoveries} &= \$24{,}800{,}000 - \$12{,}800{,}000 \\ &= \$12{,}000{,}000 \end{align*}$ 
Provision for uncollectibility — $8\%$ at risk, half collateralized:

$\$12{,}000{,}000 \times 0.08 \times 0.50 = \$480{,}000$
 $\begin{align*} \text{Net unpaid} &= \$18{,}000{,}000 - \$12{,}000{,}000 + \$480{,}000 \\ &= \$6{,}480{,}000 \end{align*}$ 
Three separate estimates sit inside that figure — the gross ultimate, the recovery ratio, and the collectability provision — and only the first is a conventional reserving exercise. The second depends on the size-of-loss distribution against the deductible, and the third is a credit judgment. An actuary reporting only the $\$6.48$ M net figure has compressed all three into a number whose largest uncertainty is not actuarial.