Tropical Storm Sandy left behind significant financial implications for homeowners, businesses, and property insurers alike. Through executive orders and press releases, several states moved quickly to relieve property owners from some of the financial burden associated with the storm by transferring a portion of the claim costs back to insurers.
A new article by Milliman’s Phil Borba presents a series of scenarios on the relationship between the insured value, the covered loss, and deductibles for a property policy. Under two sets of scenarios the findings were for 4.7% and 10.6% increases in the amount paid by insurers.
Here is an excerpt from the paper:
We developed six scenarios based on two assumed levels of loss, to illustrate the manner in which the presence or absence of hurricane deductibles might affect insured losses. The table in Figure 1 outlines these scenarios, presenting the amounts paid by the policyholder and by the insurer. Under both assumptions, the insured value is $200,000. The first three scenarios assume a 50% loss of the insured value; the last three scenarios assume a 100% loss of the insured value.
• For Scenario 1, there is a $500 standard all-perils deductible. For a $100,000 windstorm loss (50% of the insured value of $200,000), the policyholder would pay $500, the insurer would pay $99,500, and the deductible (the amount paid by the policyholder) would account for 0.5% of the amount paid by the insurer.
• For Scenario 2, there is a 5% wind deductible and a $500 deductible for all other perils (AOP). For the same $100,000 windstorm loss, the policyholder would pay $10,000, the insurer would pay $90,000 and the deductible would account for 11.1% of the amount paid by the insurer.
• Scenario 3 presents the same circumstances as Scenario 2, except the 5% wind deductible is disallowed and the $500 AOP deductible would be applied. Disallowing the wind deductible produces the same results as the $500 deductible policy under Scenario 1: the policyholder would pay $500, the insurer would pay $99,500, and the deductible would account for 0.5% of the amount paid by the insurer.
Removing the 5% wind deductible from the policy shifts $9,500 of the loss from the policyholder to the insurer. This shift increases the amount of losses paid by the insurer by 10.6% (from $90,000 to $99,500).
The three scenarios in the bottom half of Figure 1 follow the same line of reasoning but assume there was a 100% loss to the $200,000 insured value. Scenarios 4-6 use the same assumptions for the all perils, wind, and AOP deductibles that were used for Scenarios 1-3. Under Scenario 4, the $500 standard all-perils deductible would account for 0.3% of the amount paid by the insurer. Under Scenarios 5 and 6, the removal of the 5% wind deductible shifts $9,500 in payments from the policyholder to the insurer. In this case, the shift would cause a 4.7% increase in the payment by the insurer; that is, the removal of the 5% wind deductible would increase the payments from $190,000 to $199,500, for a 4.7% increase in the amount paid by the insurer.
To read the entire article, click here.