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Effect of Policy Deductibles on Expected Insurance Losses

Abstract

The study examines the effect of policy deductibles on expected insurance losses, focusing on how the amount of loss retained by policyholders before insurance coverage applies influences the expected losses borne by insurance companies. Policy deductibles are an important component of insurance contracts because they determine the portion of a covered loss that remains the responsibility of the insured. Understanding their effect is therefore important for actuarial pricing, claims estimation, and effective insurance risk management. The study will investigate the extent to which different deductible levels influence expected insurance losses. It will examine variations in deductible amounts and their relationship with claim frequency, claim severity, insurer-paid losses, and total expected claims. The study will also assess how changes in deductible levels may alter the financial exposure of insurance companies and the expected cost of insurance claims. Specific attention will be given to deductible amounts, claim frequency, claim severity, loss distributions, insurer-paid claims, policyholder-retained losses, and expected claim costs. Actuarial loss models and probability distributions will be applied to estimate expected insurance losses under different deductible arrangements. Comparative analysis will also be used to assess differences in expected losses across various deductible levels and insurance risk categories. A quantitative research approach will be adopted for the study. Relevant insurance claims and policy data will be obtained from selected insurance companies and appropriate secondary sources. Descriptive statistics, frequency and severity analysis, correlation analysis, regression analysis, and actuarial loss estimation techniques will be employed to evaluate the relationship between policy deductibles and expected insurance losses. Sensitivity analysis may also be applied to determine how changes in deductible amounts affect expected insurer-paid losses. The study is expected to reveal that higher policy deductibles reduce the portion of individual losses directly borne by insurers and may consequently reduce expected insurer-paid claims. The findings may also indicate that the effect of deductibles varies according to claim frequency, claim severity, and the underlying risk characteristics of the insured portfolio. Lower deductibles may result in greater insurer exposure to smaller claims, while higher deductibles may shift a larger portion of losses to policyholders. The study is expected to be useful to insurance companies, actuaries, underwriters, policy designers, and other stakeholders involved in insurance pricing and risk management. The findings may assist insurers in determining deductible levels that appropriately reflect expected losses and risk exposure. The study may also provide useful information for developing actuarial pricing models, estimating claims costs, and designing insurance products with suitable cost-sharing arrangements. The study concludes that policy deductibles can influence the level of expected losses borne by insurance companies and should therefore be considered in actuarial loss estimation and insurance pricing. It is therefore recommended that insurers should carefully evaluate deductible levels in relation to claim frequency, claim severity, and portfolio risk when designing policies and calculating premiums to ensure appropriate risk allocation and sustainable insurance operations.

Keywords: Policy deductibles, expected insurance losses, insurance claims, claim frequency, claim severity, insurer-paid losses, policyholder-retained losses, actuarial pricing, loss distribution, expected claim costs, insurance premiums, risk exposure, actuarial loss models, insurance risk management, deductible levels.