LESSON 6.2 · ABOUT 20 MINUTES
Coinsurance & inflation
Apply policy adjustments in the specified order.
By the end of this lesson
- Interpret insurer participation percentages.
- Distinguish inflation in losses from changes to policy terms.
Coinsurance
If the insurer pays fraction c after the deductible, the uncapped payment is c·max(X−d,0). If the policy quotes the insured share instead, convert it to the insurer share first.
Inflation
With loss inflation i, replace X with (1+i)X. Do not automatically inflate deductibles or limits unless the contract says so. Fixed deductibles change the share of losses that generate payments.
Order matters
In this lesson the cap is applied AFTER insurer participation: Y=min(c·max((1+i)X−d,0),L). Capping a covered loss before participation is a different policy. State the convention in every calculation.
Y = min(c·max((1+i)X−d,0),L)
Worked example
Original loss $1000, inflation 10%, deductible $100, insurer share 80%, maximum payment $700. Find payment.
Inflated loss=$1100. Subtract deductible to get $1000; multiply by 0.8 to get $800; apply the final payment cap to obtain $700.