The use of deductibles is an increasingly common system in the sale of insurance policies. It serves to limit the risk assumed by the insurer when underwriting any policy.
Including Deductibles in Insurance Has Two Direct Effects for the Insured Party
- On the one hand, it achieves a reduction in the insurance premium and therefore lowers the policy price.
- On the other hand, it means the insured party will share the risk with the insurer, because they will have to assume part of the claim cost.
For the insurer, the deductible means a reduction in the number of claims it receives and also a reduction in the amount of indemnities it must pay.
In technical terms, this means a reduction in the frequency and severity of claims.
In addition to achieving better prices for the client, this can sometimes allow the insurer, thanks to the inclusion of deductibles, to accept the underwriting of a policy that it might otherwise not be interested in.
What Types of Deductibles Are There?
There are percentage-based deductibles and fixed deductibles. It is also common for deductibles to be used in more complex combinations.
Fixed deductibles are those defined as an invariable amount in the particular conditions. In some cases they may be defined in the general or special conditions, but this is less frequent.
Percentage-based deductibles are established as a percentage of the amount of damage caused. Therefore, it is not possible to know in advance how much the insured party will have to assume.
In this type of deductible, it is very common to set a minimum and sometimes a maximum. This means that if the claim is very small, the insured party must assume at least a predefined amount, and if the damage is very high, the insured party does not have to assume more than an agreed amount in the policy. In many cases, this upper limit is not established, and it is important for the insured party to assess this.
This latter system is commonly used in deductibles for older homeowners’ association insurance policies.
There are business policies where a different deductible is established for each claim. For example, the first claim may have a specific deductible, sometimes zero, while subsequent claims may have increasingly higher deductibles, known as progressive deductibles.
There is another system whereby the damage must exceed a specific amount and, if it does, the full damage is indemnified. However, this is a different system from standard deductibles.