A deductible is a monetary, or sometimes a time element, amount that is regarded as being self insured by the client.. Franchise, Excess , Deductible and Self Insured Retention SIR A fr
Trang 1Deductibles Explaination
This Bulletin is designed to give guidance on the technical implications of the various forms of deductible commonly in use in the market Care should always be taken that all three parties, the client, the insurer and ourselves are totally agreed as to how any deductible is to be applied
A deductible is a monetary, or sometimes a time element, amount that is regarded as being self insured by the client
Franchise, Excess , Deductible and Self Insured Retention (SIR)
A franchise is a monetary or time element amount that is retained by the insured unless the loss exceeds the stated limit, when the loss will be paid in full
An excess is normally a monetary amount totally self-insured by the insured The simplest
example of a traditional “excess,” under a Motor Policy, for example, is where the insured pays the first $200, say, of any one loss for own damage claims
Deductible is an American expression, literally meaning a self-insured deduction from the loss In casualty classes the policy limit is normally reduced by the amount of the deductible In property classes loss limits are more commonly paid in excess of the deductible
Self Insured Retention (SIR) is a phrase used for larger clients, often with a multi-class programme, where policy limits for both casualty and property are paid in excess of the SIR
Effect of a deductible in layered risks
As mentioned above, the application of a deductible amount is often distinctly different as
between Property and Casualty risks
Liability risks are often “layered,” the attachment point of succeeding layers being determined
by the underlying maximum limit The operation of a deductible only affects the first layer and
the insurer concerned will pay up to the maximum limit of liability of the primary layer, less the amount of the deductible to avoid any shift in succeeding layer attachment points
Property risks, conversely, are often written on a total insured value or first loss basis Underwriters normally pay a loss in excess of the deductible up to the full policy limit The effect of this is that the limit is actually in addition to the deductible, rather than the deductible forming part of the limit If, as
is becoming more frequent in a hardening market, property risks are also layered then the
Trang 2“casualty” rules will need to apply to ensure the attachment points are not shifted
Deductible each and every loss
This terminology is applied to slips or quotes and needs amendment to ensure that no more
than one deductible is applied to any one loss, or series of losses arising from one original
cause
The words in bold italics are normally sufficient to address this issue but one word of caution If we use these words on a products liability policy the underwriters will apply the same principle to the application of policy limits In other words, if there were to be a whole series of losses arising from
a single insured event over a period of time then whilst only one deductible may be applied, the limit might become exhausted Further complications might arise if the losses spanned more than one policy period Underwriters usually address the question of potential “batch” losses
(particularly prevalent in the food or pharmaceutical industries) in their policy language, but this sort of problem could arise in any industry supplying multiple products
Combined Deductibles
This term is frequently encountered on Property and Business Interruption risks where the policy may be subject to a combined deductible each and every loss The effect of this is to deduct the agreed amount from the total combined loss for both Property and Business Interruption The advantage to the client is that they have a known self- retention from any one incident and can plan their funding accordingly
Sometimes programmes for smaller clients are designed with a lower or nil deductible on items such as Money risks or BI The reason for this is that the economic effect of a deductible on money risks (normally flat rated ) is negligible so there is no incentive for the client to take a deductible unless one is imposed For Business Interruption losses it is impossible to predict the total amount
of any claim, if any, before the whole costly process of adjusting the loss has been gone through In this respect, the discounts for BI deductibles are normally much less than for their PD counterparts Hence the reason for not taking a voluntary BI deductible on smaller risks, unless, again, it is
imposed as it would have limited economic effect on the premium levels
Time Deductibles
A time deductible or franchise is often imposed on electrical or mechanical breakdown risks to ensure that routine maintenance type losses lasting for, say, up to 48 hours, are not covered
Trang 3On Utility Failure extensions to BI policies there is frequently a 30 minute time deductible or 24 hour franchise to cater for incidental power outages – this deductible would be higher in
overseas territories where there is less integrity in the local national grid system
Time deductibles on other BI risks are to be discouraged as the potential monetary amount
represented by the period can often be out of all proportion to a client’s normal level of
self-retention Aon’s practice is to recommend monetary deductibles wherever possible – unless a time deductible is the only way in which cover can be obtained – as in oil and petrochemical risks, for example
Property risks will need further amendment to import a time element relative to a single event
such as a single Storm, Flood Earthquake or Riot “event” affecting several insured locations
This will ensure that only one deductible is applied to the single event, rather than a separate
deductible for each location for the same event
The period allowed is usually 72 hours, which can span policy periods if necessary, and the
clause is therefore frequently referred to as the “72 hour” clause
Working or Residual Deductibles
For major risks the client will select a limit below which they would normally expect to deal with losses in house and for which they have no expectation of insuring The amount selected will vary
by size and type of business, but the intention is to totally exclude maintenance type losses from the loss statistics
The term “residual” deductible is also frequently applied to the self-retention insurers expect the client to retain should an aggregate deductible be breached
Aggregate deductible
Underwriters recognise that clients have a limited capacity for self-retention so are able to offer a price to limit the client’s total retention of deductibles for losses any one year to a specified
amount The Aggregate can be for a single class, or tower, of business, such as Public/Products liability or could be combined across several classes, or towers such as Property, BI, PL/Prods, PI, E.L and Motor
Normally the residual or working deductibles do not contribute towards the erosion of the aggregate limit, and are termed “non-ranking.”
The funding of the Aggregate is the most common reason for client’s wishing to form Captive
Trang 4Insurance Companies, particularly where smaller subsidiaries are unable to withstand the full
effect of the deductibles imposed and need to “buy down” the deductible to a more acceptable level to their operation