Insurance Academy

Deductibles: Pest or Partner?

By | April 4, 2018

Stop me when you’ve heard this story before. A customer calls to report a claim. It’s a small business and they have a few delivery trucks running around their city. One of them was backing out of a customer’s driveway and took out the brick mailbox, damaging the truck as well.

That’s when it’s time to discuss the liability issue, get the name and phone number of the homeowner so that a liability adjuster can find out what that mailbox is going to cost to replace. It’s also time to take pictures and get estimates for the damage to the truck and remind the customer about their deductible. That’s when the conversation stops going as well as you had hoped.

The deductible is as much a part of insurance policies as exclusions are. And they’re just as hated and misunderstood. People look at the deductible as some sort of penalty. Insurance companies aren’t helping that impression with some of the policy options that they are offering. One company offers a no deductible policy for their app-based homeowners’ and tenants’ policies. Of course, what they don’t mention is that the option is only available in limited areas and there is a cost associated with it. It’s possible that some customers would pay as much in premium as they would for a deductible in the event of a loss.

Auto insurers are using some form of a sliding deductible, which “rewards” customer loyalty and no claims history with a lower deductible year over year, eventually making the deductible go away. That sounds great, but it’s less about the customer than it is about the company keeping the customer renewing their policy to get that “reward”.

One homeowners’ insurer in Florida offer what it calls it’s “deductible installment plan”. From what their marketing materials show, it appears that for some losses the insured will accept deductible in payments, like a short-term loan. There is policy language associated with it, but it’s protected as trade secret, so I couldn’t find it (yet, I’m still looking for it). What’s the problem with that? I don’t want to walk down that road. I’ll restrain myself today and move on.

Rather than help people to understand why the deductible is on their policy and have a conversation about deductibles, we resort to making the deductible the bad guy. It reality, deductibles serve a purpose for both the company and the customer.

A deductible is a way to minimize some losses.

When I was a fire department underwriter, we had portable equipment policies. These policies were pretty comprehensive and had broad coverage. Many of the accounts that had policies with us for years had low deductibles. I mean low low. I wouldn’t say that there were a lot of accounts that had a zero dollar deductible, but I won’t say that there weren’t any.

The result was that there were accounts that had a bunch of little claims. A volunteer is cutting the grass at the station and runs over his cell phone. Pay the claim. A handheld radio is run over by a truck. Pay the claim. You get the point. For many businesses and individuals, the existence of a deductible makes them less likely to file a claim. For example, if I run over my cell phone, I’m more likely to file a claim with the insurance that I pay for through the carrier because the deductible is a lot lower than my homeowners’ policy deductible.

It also works to make us a little more careful with our stuff. If a customer knows that she is going to have to pay the first $1,000 of a loss, she’s likely to choose drivers with better safety records than her brother who may have had a few speeding tickets. In this sense, a deductible is a risk control measure.

A deductible is a way to mitigate certain risks.

There are property perils in particular that many insurance companies shy away from. You know the ones: wind and hail, flood, and earthquake. Those are the big ones. Living in Florida, I expect that my homeowners’ policy will be offered with a wind deductible. That is kind of normal. I didn’t expect a specific earthquake deductible. Maybe the company knows something I don’t. I may have to call them soon.

We all understand that this is less about mitigating the customer’s risk and more about mitigating the company’s risk. Many companies will use different methods to mitigate their risks for these particular perils, including declining to offer coverage or making their underwriting rules so strict that only a select group of customers make it past the gatekeepers. So when they offer the coverage, they use these deductible options to mitigate that risk.

When I think about wind and hail in particular, I think about the situation in Florida, where many carriers don’t offer coverage in specific areas of the state, and they push the risk to another company. I also think about the mitigation features that are used in construction that give carriers more appetite to write the peril.

A deductible is a way to maintain cost controls.

I think I know what you’re thinking about here. How does a deductible control cost? We all know that carriers will offer a rate reduction based on deductibles, right? Increased deductibles can be a good way to control the rate on a policy, or a business’s insurance program, but there is more to consider than the possible rate reduction.

Can the customer absorb the additional risk themselves? What does their past loss history look like? Do they have several little losses? Do they have a clean loss history? If you can make some reasonable estimates that they are not likely to have additional retained losses below the deductible, you might find some savings. Of course, with a higher deductible, we go back to the possibility of improved loss performance based on the increased attention to their own loss retention.

No deductible plans, sliding deductible plans, and all of the other deductible bashing opportunities out there create the idea that the deductible is your enemy. No customer likes a deductible when they first meet it. My first meeting with a deductible was not a great day. My car was wrecked and now I had to come up with $500 while I was in college with a wife and two sons. I didn’t thank my insurance company for the deductible on that day. I’m a little more experienced now and I’ve learned a few things since then. It’s still not my favorite thing, but I see the point of having a deductible and it’s not such a bad thing.

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