By Jonathan Brutlag and Kevin Carnell
Most people are familiar with the concept of an insurance deductible. Often first introduced when purchasing automobile or homeowners’ insurance, deductibles are a way for policyholders to lower insurance premiums by agreeing to cover a portion of the loss that falls under the policy’s coverage.
Choosing to add a deductible to an insurance policy can reduce premium costs, but it also introduces some uncertainty into the total cost of risk. In this way, a deductible might seem similar to a self-insured retention (SIR) or captive insurance, but on a smaller scale. However, there are important differences between deductibles and these other alternatives.
Key Differences Between Deductibles, SIRs and Captives
The primary difference is that a deductible is a component of an insurance policy, whereas SIRs and captives are separate layers of risk management. Medical malpractice insurance policies typically include a “duty to defend” provision, which means the insurance company is obligated to defend the policyholder against claims covered by the policy. In contrast, with an SIR or captive structure, the insured organization is responsible for handling its own defense.
The insurance company manages the entire claim process when a deductible is part of the insurance policy. While the insured party must cooperate with the insurer in defending claims, the insurance company assumes the burden of investigating the allegations, establishing reserves, assigning legal counsel as needed, and tracking the claim throughout its lifecycle. Since these are core functions of insurance companies, they can offer significant advantages in terms of experience and scale.
How Deductible Payments Work
Another key advantage of deductibles when it comes to medical malpractice insurance is that the insurance company typically pays the full amount of a claim when required, and the insured party reimburses the insurer for the deductible portion afterward. This arrangement ensures that lawsuits or settlements are not delayed due to waiting on payment from policyholders. It also provides policyholders with some opportunity to budget payments, as deductible reimbursements are often billed on a monthly or quarterly basis.
Weighing the Costs and Benefits of Deductibles
Deductible programs introduce a degree of uncertainty into the total cost of risk but limit that uncertainty to the actual cost of claims. With deductibles, an insured party does not need to consider potential fluctuations in administrative expenses associated with self-insurance vehicles. This structure also minimizes concerns about rising costs from third-party administrators, actuaries or captive management firms.
When an insurance company provides the primary layer of coverage, insured parties often benefit from additional services, such as risk management programs or dividends paid to policyholders. These services can add significant value to the policyholder beyond the immediate benefits of the coverage itself.
Adding a deductible to an insurance program can be an effective way to reduce premiums. However, organizations should carefully consider whether the premium savings outweigh the potential losses within the deductible layer and the uncertainty that comes with it.
Jonathan Brutlag and Kevin Carnell are with MagMutual. Brutlag serves as Professional Security Insurance Company Officer a Professional Security Insurance Company Officer Carnell is the National Complex Accounts Officer.
