Customers have a marked preference for insurance policies with low or no deductible. Several experiments have shown that people tend to underestimate the value of a deductible policy, and that the degree of underestimation increases with its size. When pricing a deductible policy, the price of a full coverage policy is first considered, then they "anchor" the deductible and compare it to the subtraction of the price of the full coverage policy and the price of the deductible coverage. As an example, if we compare two coverages, one with a premium of $1,000 and deductible of $2,000,and another with a premium of $1.100 and $500 deductible, the insured usually makes the calculation that he is paying $100 extra for an increase in coverage of $1.500. However, they do not adjust the coverage sufficiently to consider the fact that there is only a small chance that the deductible will apply to their payments[1].

Insurers take advantage of this preference to sell more coverage, but does this really improve the results? The virtues of deductibles are known, they make the insured take more care of their assets (Moral Hazard), reduce the premium, reduce the costs of the claims and the number of claims that the insurer must attend, where sometimes the cost of settling the claim is very high compared to the damage itself.

 

In this report, we can observe the difference in the Loss Frequency and the Loss Ratio depending on the type of coverage.

From your experience, do high deductibles allow the number of loss adjusters to be significantly lower than when there are higher deductibles? Leave us your comment:

 

 

 

 

 


[1] Shapira, Z., & Venezia, I.(2008). On the preference for full-coverage policies: Why do people buy toomuch insurance?. Journal of Economic Psychology, 29(5), 747-761.

‍