It should be no surprise that a common motive for new clients is to lower their insurance premiums. It should also be no surprise that since we complicated our business model and have a variety of carriers that we share that same passion.
First- What is a deductible? A deductible is when the insureds financial risk retention for a covered loss. The insured will always be responsible for some portion of the loss. To my knowledge, “full coverage” isn’t offered for homeowners’ policies now of days. (Full coverage being no deductible.)
A common tactic we come across when examining the current policy is 1%, 2%, 3%, or 5% deductibles for homeowners’ policies. What is the harm in a 1% deductible?
Is it worth having a higher deductible?
Most homes in Atlanta and its surrounding suburbs (such as Cobb, Paulding, Forsyth, and Gwinnett) cost anywhere between 150,000 and 500,000. A 1% deductible can range from 1,500 to 5,000 with a 1% deductible. This quite common to see with State Farm policies. Agents are forced to lower their loss ratios and do so by doing their clients a “favor” by reducing their premium costs and increasing the risk retention of the client.
This example still does not answer the question of “is it worth it?”
If having a higher deductible lowers the premium, shouldn’t 5,000 deductible lower the premium?
Yes, but not as much as one may think.
For example, if we have $200,000 home, here are two options.
A) 1000 premium for 1,000 deductible
B) 980 premium for 1% deductible.
Should our clients opt to take the 20/year in savings, they will need not to have a loss for 50 years for that money to make up the difference. That doesn’t account for the increase in cost to rebuild a home over that 50 years, or inflation. To recommend a 1% deductible for our client in this scenario would be helping only the agent and insurance company.
For a small reduction in premium, they are mitigating $980 of their loss ratio. That significantly favors the insurance company. Now multiply this over 1,000’s of clients.
This kind of example is where we at TWG start to worry about the “saving money” narrative.
It should be no surprise to see this when agents work directly for the company. Their fiduciary responsibility is not to the premium paying clients, but to their master company.
That does not mean we will never opt-in for a higher deductible! In many cases, higher deductibles up to 1,000 can be quite financially beneficial for our clients! If we can save 250/year by going from a 500 to 1000 deductible, we will most certainly suggest the increased risk retention, so long as the client understands they need to have 500 more in savings.
One of the most significant hurdles we face is client trust. Many clients approach independent agencies hoping to drive their insurance cost down and think that lowering the premium is the only metric of success.
In my ten+ years in insurance, nobody has ever thanked their agent or me for the lack of coverage
When we take on a client, we are now responsible for the unknown. Piece of mind is fantastic for our clients, and it is why we take to try to educate our clients as much as possible to avoid a denial or an expensive mistake in the future.
