In case of large deductible (commercial) policies, the insurance company pays for losses, and then recuperates the deductible. This subject the insurance company to credit risk.
Why or how did this process evolve in the first place? Why doesn't insurance company make payments net of deductible in the first place?
E.g., A cotton mill in South Carolina is insured by AIG, and for simplicity, say, the factory is insured for 50 million fire loss, with a deductible of 2 million. Now say, there is a fire, factory burns to ground, there are no casualty or fatalities, only property loss.
Why would AIG pay factory owner 50M and later collect 2M? Why not pay only 48M to start with?
Why or how did this process evolve in the first place? Why doesn't insurance company make payments net of deductible in the first place?
E.g., A cotton mill in South Carolina is insured by AIG, and for simplicity, say, the factory is insured for 50 million fire loss, with a deductible of 2 million. Now say, there is a fire, factory burns to ground, there are no casualty or fatalities, only property loss.
Why would AIG pay factory owner 50M and later collect 2M? Why not pay only 48M to start with?
Large deductible policies