The Franchise Deductible Policy

ll numerical results in this paper were ned using the software package CRAC 2.0., which use Jewell’s hierarchical model. The hierarchical credibility model can be applied to solve quite a number of practical insurance problems. The one studied here is the problem of the franchise deductible policy in credit insurance, but the same philosophy and ideas can be applied for franchise deductible policies in any type of insurance. 1. Problem definition and example The main practical question is: what is the premium reduction in case a franchise deductible of a% of the commercial premium is introduced? So, the question to be answered in this paper is the following: which discount on the risk premium can be given by introducing a deductible. Let us illustrate this problem by means of a specific example in credit insurance. So, a practical example will be given to illustrate the possibilities of credibility. Assume that: (i) an insured company pays a (commercial) premium of 100.000 (in some currency), which covers all losses, without franchise deductible; (ii) the risk premium (commercial premium minus administration costs and safety loadings) equals 60.000 (60% of the commercial