Policy Adjustments

Policy Adjustments are the modifications applied to a raw loss amount — deductibles, coinsurance, and benefit limits — that transform the ground-up loss X into the insurer's net payment. Applied in sequence, they determine the payment random variable from the loss random variable.

A loss of $8000 occurs under a policy with a $1000 deductible, 80% coinsurance, and a $5000 benefit limit. What does the insurer pay?

1. Apply deductible: 8{,}000 - 1{,}000 = 7{,}000.
2. Apply coinsurance: 0.80 \times 7{,}000 = 5{,}600.
3. Apply benefit limit: \min(5{,}600,\ 5{,}000) = 5{,}000.

The insurer pays $5{,}000.