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Effect of Policy Excess Levels on General Insurance Premium Rates

Abstract

Policy excess is an important feature of general insurance contracts because it determines the portion of an insured loss that is borne by the policyholder before the insurer pays the remaining eligible claim amount. The level of excess can influence claim frequency, average claim payments, expected losses, and the overall risk transferred to the insurer. Changes in policy excess levels may therefore affect the premium rates charged for general insurance policies. This study examines the effect of policy excess levels on general insurance premium rates. The study will investigate how variations in excess amounts influence the actuarial assessment of expected losses and the resulting premium rates. Particular attention will be given to the relationship between excess levels, claim frequency, claim severity, expected insurer losses, and premium determination across general insurance products. The study will consider factors such as policy excess amounts, claim frequency, claim severity, expected claim costs, loss distributions, policy exposure, operating expenses, and premium rates. Actuarial pricing techniques will be applied to estimate expected losses under different excess structures and determine their implications for premium calculations. Comparative analysis will also be used to examine premium differences associated with alternative excess levels. A quantitative research approach will be adopted for the study. Relevant general insurance claims and premium data, together with hypothetical loss distributions, will be analysed using actuarial pricing models, probability distributions, expected loss calculations, and premium rating techniques. Sensitivity analysis will be conducted to assess how changes in policy excess levels affect expected claim costs and premium rates. The study is expected to reveal that higher policy excess levels may reduce insurers' expected claim payments and consequently result in lower premium rates, particularly for portfolios with frequent small claims. Lower excess levels may increase the proportion of losses transferred to insurers and consequently increase the expected cost of claims and premium requirements. The magnitude of the effect is expected to vary according to claim frequency, claim severity, loss distribution, and the type of general insurance policy. The findings of the study may provide useful information to actuaries, insurance companies, underwriters, policyholders, and regulators. Understanding the effect of policy excess levels can support more accurate premium rating, effective risk classification, appropriate policy design, and improved management of expected claims costs. The study may also assist insurers in evaluating excess structures that appropriately reflect the level of risk transferred between policyholders and insurers. The study concludes that policy excess levels can influence general insurance premium rates because changes in excess amounts affect the expected portion of losses borne by insurers. It is therefore recommended that insurers incorporate excess levels into actuarial pricing models, analyse claims experience across different excess structures, and regularly review premium rates to ensure that they adequately reflect expected losses and the risk characteristics of general insurance policies.

Keywords: Policy excess levels, general insurance, premium rates, insurance pricing, excess amounts, claim frequency, claim severity, expected losses, insurer claim payments, loss distributions, actuarial pricing, premium determination, policy exposure, claims costs, risk transfer.