Monte Carlo simulation is used to help select the right specific deductible level.

Monte Carlo simulation is used to help select the right specific deductible level.

• A. True
• B. False
• C. Not used
• D. Only used for pricing

Answer: (A)

Monte Carlo simulations let you evaluate how different deductible levels perform across many possible future loss scenarios. By modeling claim frequency and severity with probability distributions and running thousands of simulated years, you can see how a given deductible changes both the insured’s out-of-pocket costs and the insurer’s expected payouts, as well as the distribution of total costs. This helps you compare deductible options in terms of expected value, variability, and tail risk, so you can pick a deductible that balances affordability for the insured with adequate risk transfer for the insurer. It’s a flexible tool not limited to pricing alone; it supports deductible design by capturing uncertainty and potential extreme outcomes.

Monte Carlo simulations let you evaluate how different deductible levels perform across many possible future loss scenarios. By modeling claim frequency and severity with probability distributions and running thousands of simulated years, you can see how a given deductible changes both the insured’s out-of-pocket costs and the insurer’s expected payouts, as well as the distribution of total costs. This helps you compare deductible options in terms of expected value, variability, and tail risk, so you can pick a deductible that balances affordability for the insured with adequate risk transfer for the insurer. It’s a flexible tool not limited to pricing alone; it supports deductible design by capturing uncertainty and potential extreme outcomes.