The Proper And Improper Use Of Deductibles In Designing Insurance Coverages
I recently read an article written by Mike Brown on the website "meetbreeze" regarding how little cash a large proportion of people possess. The study showed that 24% of Americans did not have enough savings to cover an emergency expense of $250 and 47% could not cover a $1,000 expense. The data was based on a study of 1,500 Americans.
Those numbers correlate with common deductibles in personal insurance policies. Now that deductibles commonly exceed $250 and homeowners deductibles for roofs in many geographic locations now exceed $1,000 as the starting point, agents need to think harder about deductibles and how to communicate with clients regarding the importance of considering the dollar amount of the deductibles in a policy.
My point is especially important when one considers how carriers might be incentivized to issue higher deductibles so that they can lower payments. This can happen in two ways. The first is that by issuing more policies with higher deductibles resulting in a decrease in claims payments. In turn, two factors decrease payments under this scenario. The first is carriers simply do not pay as many small claims. Evidence is strong based on the detailed claims data published by A.M. Best that carriers are paying fewer small claims, especially if adjusted for demographics. The second is that the claim payment is smaller because the deductible is higher.
Outside of these carrier issues, agents should deeply consider what deductibles to recommend to a customer when asked. It is likely unethical to recommend high deductibles to someone who does not have the cash for the deductible.
I really feel for economically challenged insureds because they are caught between a rock and a hard place. They need the premium savings resulting from higher deductibles, but they don’t have the cash for the deductible. They must make a hard decision. The best an agent can do is give them their options and educate them on the importance of having the cash to cover the deductible. Even to the point where some people may think, "If I don't have the cash, I just won't get it repaired." Helping the insured understand this logic might make them uninsurable or only insurable on a limited basis is important. These consumers need the right insurance more than most because they are already living on the edge. A small claim can result in disproportionate harm.
On the other hand are the wealthy people. They probably pay too much for insurance because their deductibles are not high enough. They have the cash for high deductibles, especially on certain schedules and homes (based on the location).
Deductibles are like everything else in insurance: unique to the insured. Talk to your clients and educate them to make good decisions rather than cheap solutions.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.