Policy Information

Study guide: Exam P-1

Policy Information (or provisions) refers to the contractual terms of an insurance policy that determine how much of a ground-up loss $X$ the insurer pays.

The main provisions are Deductible ( $d$ ), benefit limit ( $u$ ), and coinsurance ( $\alpha$ )
These provisions transform the loss random variable $X$ into a Payment Random Variable $Y$
The policy features allocate financial responsibility between the insured and insurer, affecting both expected payments and risk exposure:

$\text{Payment} = g(X;\ d,\ u,\ \alpha)$

Identifying Policy Provisions from a Contract A health policy states: the insured pays the first $500 of any claim, the insurer covers 80% of amounts above $500, and the insurer's maximum payment is $10,000. Identify each policy provision.

Answer

Deductible: $d = \$500$ (insured absorbs the first $500)

Coinsurance percentage: $\alpha = 80\%$ (insurer pays 80% of the excess above the deductible)

Benefit limit: $u = \$10{,}000$ (maximum the insurer will pay in total) These three provisions together define the payment function for any ground-up loss $X$ .