The deductible is the most misunderstood element of insurance: many file it under “deduction”, when it is in fact a decision-making tool – it sets where the building's own share of the burden ends and the insurer's begins. Chosen well, it saves premium and spares administration; chosen badly, it either makes the policy needlessly expensive or causes disappointment when a claim comes.
- The deductible is the first part of a loss, borne by the building – it can be a fixed amount, a percentage or a combination of the two, and it can differ from cover to cover.
- A higher deductible → typically a lower premium and a bigger share to carry when a claim comes; a lower deductible → the other way round.
- The right choice depends on the building's claims statistics and its reserves: it is not worth paying insurance below the level of “a small loss we can absorb”.
How does the deductible work?
The deductible is the amount or share that the building itself bears when a claim happens: the insurer settles the part above it in line with the policy terms. It comes in several forms: a fixed amount (a set sum per claim event), a percentage (a set share of the loss), or a combination (a percentage, but with a minimum and/or maximum amount). One important detail is that the deductible can differ from cover to cover – it may be different for glass breakage than for water damage – and for special risks it is typically higher.
The economic logic
For the insurer, a lot of small claims are disproportionately expensive: the fixed cost of claims handling is large relative to the payment on a small loss. So it “rewards” with a lower premium the building that takes the small claims on itself. Seen from the building's side, the same question sounds like this: is it worth paying insurance premium for losses that the reserve can absorb without flinching? The answer is typically no – insurance is there for the big, unbearable losses, and the reserve is there for the small ones.
The right deductible for a building: two questions
First question: what does the building's claims profile look like? If the claims statistics are dominated by many small losses – minor glass damage, smaller leaks – a low deductible may feel comfortable, but the building pays for it in premium; the combination of a higher deductible plus prevention is often the more sensible route. If claims are rare, a higher deductible is almost pure saving. Second question: how big is the kitty? The deductible should sit at a level the building's reserve can carry without trouble – a deductible is not a reason to borrow, it is a planned own share. On reading the claims statistics: claims statistics and the renewal.
The deductible in a comparison
When quotes are set against one another, the deductible is the “hidden dimension”: two quotes at the same premium are worth quite different things with different deductibles. That is why in my comparison table the deductible gets its own column for each cover – next to the premium there is always the figure showing how much the building carries when a claim comes. This is one of the pillars of comparison based on content. And the closing principle: the deductible decision belongs to the community – my job is to show its consequences in advance, in numbers.
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