Can Percentage Deductibles Revive the Property Casualty Market?

The property casualty market faces severe financial strain, prompting a shift towards percentage deductibles as a potential remedy. Unlike fixed-dollar deductibles, percentage deductibles are calculated based on a percentage of the insured property’s value. For example, a 2% deductible on a $300,000 home would result in the policyholder bearing $6,000 in the event of a claim.

Potential for Market Revival:
Implementing percentage deductibles can stabilize insurers’ financials by transferring more claim costs to policyholders. This increased stability may encourage insurers to return to markets they had previously abandoned.

Re-Entry into Abandoned States:
With better risk-sharing between insurers and policyholders, insurance companies might reconsider entering states they left due to high risk. The adoption of percentage deductibles and improved risk management could make these markets more viable.

Impact on Policyholders:
While percentage deductibles help insurers manage costs and risks, they also mean higher out-of-pocket expenses for policyholders. This could incentivize homeowners to take preventive measures, though it adds complexity to understanding insurance policies.

Reasons for Adoption by Insurance Companies:
Insurance companies are adopting percentage deductibles due to rising reinsurance costs, the need for cost management, the sustainability of premiums, and improved risk-sharing. With reinsurance costs doubling from 2019 to 2023, insurers must find ways to manage expenses without constantly increasing premiums.

In summary, while percentage deductibles offer promise for revitalizing the property casualty market and attracting insurers back to high-risk areas, they also pose challenges for policyholders. Balancing these factors is essential for the long-term stability of the insurance industry.