DEDUCTIBLES: WHEN IS TOO LOW TOO HIGH?

By Cross Insurance | Oct 23, 2012

Common sense might suggest the lower your insurance deductibles, the less you'll have to take out of your own pocket. Unfortunately, the issue is a bit more complex.

 For the insurance company, the primary purpose of a deductible is to eliminate having to pay for typical minor and frequent losses, together with the necessary expenses related to adjusting them. In return for you agreeing to pay such losses, the insurer provides a rate credit against your premiums.

So does it follow that the higher the deductible, the greater the rate credit? Not necessarily. Once the rating factors reach a point where the vast majority of nuisance claims are no longer covered, the amount of expense the carrier can save by increasing the deductible amount becomes negligible and so does the additional amount of premium credit to you.

To determine the level of deductible that's best for you, consider three key factors:

1. How much can you afford to pay based on your financial comfort level and the expected frequency of your claims? For example, although a single $2,500 deductible might seem easy to absorb, what if you have several such claims in a year? If you anticipate low claims frequency in typical years, how financially painful will it be for you to take multiple deductible hits in a single bad year?

2. How does the deductible apply under your various coverages? For example, a Property policy might have a single deductible that covers any single loss for all of your damaged or destroyed property, while other forms might apply the deductible separately to your building and business personal property. If you have several buildings at a single location damaged by a single occurrence (such as a major fire, tornado, or hurricane), will the deductible apply separately to each building, or only once to the loss to all the buildings?

3. How much will you save? Once you know how much you have at risk due to the amount and application of your possible deductible amounts, consider your premium savings at each of the various deductible levels. Is the risk to your profit statement worth the savings in premium? Decide at what point the balance between the premium saved and the assets risked is most comfortable for you.

We'll be glad to review with you your current policy deductibles, how they apply, and what options/premium savings are available. Let us help make sure that your program provides you with the best combination of cost and benefits now and in the future.

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