Deductibles – Do you know what you have on your policy?

There was a time when you had one deductible for your insurance. You knew that this was the amount that you would pay in settling a claim. There were established discounts for raising that deductible and as your risk tolerance increased, your premium decreased. Those days are gone, and your latest insurance policy may have a number of different deductibles. Deductibles have evolved into a tool for exposure and risk management for policyholders and insurance companies.

Wind and Hail Deductible

Most personal lines and commercial property insurance policies now have a separate wind and hail deductible. This can be a set dollar amount or a percentage deductible. The percentage is not a percentage of the claim, but the percentage of the building value. Since roofing represents an average of 3% to 5% of the value of a building, a 2% deductible is significant.

Earthquake / Earth Movement Deductible

This line of business has commonly used a fixed dollar amount or a percentage deductible. The percentage deductible of 5% to 20% is common and must be evaluated in terms of your values. A common loss anticipated in our area is damage to brick veneer on frame structures. The cost of brick veneer averages between 7% and 10% of the property value, so this deductible may leave you with a substantial cost. The deductible applied increases as your seismic exposure increases.

Flood / Water Damage Deductible

Flood insurance carriers generally offer premium discounts for higher deductibles. Premiums increase with your exposure and the use of FEMA flood maps are a common tool for exposure determination.  Knowing your property elevation data is crucial to managing the cost of flood insurance. Making sure the flood determination is accurate is a key question for your insurance provider. As more insurance companies use third party services, address accuracy and geocoding are critical to this process.

Property Deductible Risk Management

The first step in deductible management is to know the dollars at risk. Having accurate property valuations will allow you to model the deductible amounts.  Determine if the deductible is a per occurrence deductible, so one deductible applies to the entire event versus a per building deductible. A per event or per occurrence deductible is easier to understand and manage.

Stop Loss for Deductibles

For a deductible per building policy, you need accurate property values, and an estimate of how many properties could be exposed to the same event. You need to model the different locations for loss estimates for different perils.

For a schedule of values with multiple locations subject to a single event, the per building deductible can be a very large number. You may consider asking to negotiate a stop loss that would cap the deductible at a certain figure. This allows you to limit your loss exposure to a catastrophe event.  A stop loss value can be negotiated to limit the single event number to a known value.

Deductible Buy Back Insurance

Ironically since one market is requiring the deductible, another market is growing to cover the deductible itself and buy back the dollars.  For large property exposures this can be a good risk management tool. Deductible buyback programs exist for wind, hail, flood and earthquake perils. Coupling a stop loss with a buyback is an effective tool for risk management.

Liability Deductibles

General liability policies may come with a deductible for liability losses. This can be to control loss frequency or to encourage risk management activities by the policy holder. This can also be expressed as Self-Insured Retention (SIR), where the insured manages their own claims to a certain value. An SIR is common in captive insurance programs and may be required for some excess liability policies. SIR is common in professional risk such as Errors and Omissions, Employment Practices and Executive Risk, Directors and Officers policies. Cyber liability policies may also include SIR.

There is an important difference between deductible and SIR. With a deductible the insurance company handles the loss adjustment process from day one. With SIR in place, the policyholder must manage the claim until the SIR limit is reached. You should consider how you will handle a claim if your policies include a significant SIR.

Workers’ Compensation Deductibles

Employers may opt for a deductible for small workers compensation claims as a management tool for their experience modification rate (EMR). This is a decision that is reached via careful loss analysis and modeling of EMR impacts. It is generally a choice made by the customer, not the insurance company. Some insurance companies will not offer this program as they are concerned with delays in claim reporting.

Auto Deductibles

Most people are familiar with deductibles for comprehensive and collisions insurance. It is possible to have vehicle specific deductibles to address either older or high value / high performance vehicles. This can be a good risk management tool for vehicle schedules with multiple units.

Similar to a general liability deductible you may see a liability deductible for auto. This is not a common tool, and many insurance companies decline to offer this as they want to avoid any delay in claim reporting.

The Driehaus Difference

Our understanding of coverages, insurance forms and market appetite make us agile in evaluating how a deductible can impact your cost of risk.  The day of higher deductible equals lower premium has given way to insurers using deductible to address their loss exposure. You need an insurance agent that can see through the numbers to help you make an informed choice. Call 513-977-6860 or contact us via our website, www.driehausins.com to discuss your needs. We want to be your insurance provider.