Pricing for the Financial Risk of Uncollateralized Deductible Policies

A substantial number of National accounts have insurance programs with large retentions (i.e. deductibles) which can range from $100,000 to $1,000,000 per occurrence. This high retention business obviously limits the insurance risk to the insurance company. However, if the insured with a deductible program goes into default, and is unable to pay its' insurance liabilities, it becomes the insurance company's responsibility. In this case a financial liability has been created for the insurance company. Typically, insurance companies will request some form of collateral in order to limit this financial risk. However, in many cases, insureds are unwilling, or unable, to provide collateral for the entire liability. To the extent that an insured with a deductible program does not provide sufficient collateral, there is a cost that must be built into the program design to account for this financial risk. In some instances (ie. for low rated accounts, with "insufficient" collateral), this cost can be substantial, and can in-fact, exceed even the calculated excess premium for an account. The purpose of this paper will be to develop a methodology to estimate the "cost" associated with this financial risk, based on the following variables: ultimate deductible loss liability, financial rating, original collateral collected. The methodology will also consider the payout of losses, which is dependent on the line of business and the applicable deductible.