Aggregate deductible
Aggregate deductible term refers to the limit placed by a policyholder, which indicates the mandatory responsibility to pay on the reported claims in specified timeframe. Most often considered as one of the features included in liability policy dedicated for a product. Aggregate deductible normally refers to the period of time equal to one year.
Definition
Albert Amato in his scientific work defines, that the "aggregate deductible is sometimes placed in an excess of loss treaty to protect the reinsurer from claims it otherwise would be responsible for within the treaty. It should also assist in keeping reinsurance costs down. The amount of the deductible is determined in advance by the parties". It provides the additional protection to the insured, especially in the situations linked with e.g. high frequency losses [1].
The aggregate deductible level is to be determined by the particular entity. It does not apply to amount of the charitable contribution, which under standard conditions tends to remain at stable level.
How to dedictable?
Jay A. Soled indicates the criteria for deductibility [2].
- Contribution of cash and nonappreciated property are in aggregate, deductible up to 30 percent of the donor's contribution base,
- Capital asset contributions that are eligible for long term-treatment are, in aggregate, deductible up to 20 percent of the donor's contribution base,
- Ordinary income items and capital asset contributions that are eligible for short-term treatment are, in aggregate, deductible up to 30 percent of the base.
Insurance
Manufacturer in order to reduce risk of mass production can purchase product liability insurance. If the problem occurs, the claims are first covered by manufacturer to the level of aggregate deductible and then by insurer. The deductible is called aggregate because it is aggregated along all the claims related to insured product.
Aggregate deductible is the highest sum paid out-of-pocket for covered expenses that has to be paid before insurance company will pay the remaining costs. Aggregate deductible is usually related to product liability policy [3].
From the corporate and risk perspective, the aggregate deductible and its limits are being defined as "numbers to cover the firm’s desired retention on a portfolio basis and thus reflect the recognition that all risks will not results in losses at the same time" . In such conditions, coverage gaps do not occur, hence some specific cases may refer rather to efficiency enhancements. Such reinforcement can "prevent capital from being parked idly in one risk silo when it could be covering a loss in another (or returned to shareholders)" [4].
Examples of Aggregate deductible
- Commercial Auto Insurance: In commercial auto insurance, the aggregate deductible is the amount of money the policyholder must pay out-of-pocket before the insurance company will pay for any claims. For example, if the policyholder has a $2,000 aggregate deductible, they must pay the first $2,000 of any claim before the insurance company will cover the remaining costs.
- General Liability Insurance: In general liability insurance, the aggregate deductible is the total amount of money the policyholder must pay out-of-pocket before the insurance company will pay for any claims. For example, if the policyholder has a $2,000 aggregate deductible, they must pay the first $2,000 of any claim before the insurance company will cover the remaining costs.
- Professional Liability Insurance: In professional liability insurance, the aggregate deductible is the total amount of money the policyholder must pay out-of-pocket before the insurance company will pay for any claims. For example, if the policyholder has a $2,000 aggregate deductible, they must pay the first $2,000 of any claim before the insurance company will cover the remaining costs.
- Workers' Compensation Insurance: In workers' compensation insurance, the aggregate deductible is the total amount of money the policyholder must pay out-of-pocket before the insurance company will cover any claims. For example, if the policyholder has a $2,000 aggregate deductible, they must pay the first $2,000 of any claim before the insurance company will cover the remaining costs.
Advantages of Aggregate deductible
An Aggregate deductible provides many advantages for policyholders. These include:
- Reduced premiums: Aggregate deductibles typically allow for lower premiums than traditional deductibles, as the policyholder is responsible for a smaller portion of the claims reported.
- Financial protection: Aggregate deductibles help to protect policyholders from financial losses in the event of a claim, as they are only required to pay the deductible amount in a specified timeframe.
- Flexibility: With an Aggregate deductible, policyholders can choose the schedule that works best for them and their budget. This allows them to pay a smaller amount over time rather than a lump sum deductible.
- Coverage: Aggregate deductibles provide coverage for all claims reported within the specified timeframe, which helps to ensure that the policyholder is not left with any uncovered claims.
Limitations of Aggregate deductible
A one-time aggregate deductible can limit a policyholder's ability to cover large losses. Some of the limitations of this type of deductible include:
- It is a fixed amount that must be paid out of pocket before the insurance company covers any claims.
- It is only applicable in the event of multiple claims, so if only one claim is made, the policyholder must still pay the full amount of the deductible.
- The amount of the deductible is usually set at a high level, and can be difficult to pay in the event of multiple claims.
- The deductible is not refundable, even if the policyholder does not make any claims.
- It does not cover any legal costs associated with the claims.
In addition to the standard form of an Aggregate deductible, there are several other approaches that can be used to manage and customize this type of policy.
The other approaches related to Aggregate deductible include:
- Risk Aggregate Deductible - This type of deductible requires the policyholder to pay a certain amount of money for any claim that exceeds the deductible limit.
- Per Claim Deductible - Under this type of deductible, the policyholder is responsible for the full amount of each claim filed.
- Aggregate Stop Loss - This type of deductible requires the policyholder to pay a certain amount of money for any claims that exceed the aggregate limit.
- Aggregate Retrospective Deductible - This type of deductible requires the policyholder to pay a certain amount of money for any claims that exceed the aggregate limit, but are paid for by the policyholder after the policy has been renewed.
In summary, there are several approaches to Aggregate deductible, including Risk Aggregate Deductible, Per Claim Deductible, Aggregate Stop Loss, and Aggregate Retrospective Deductible. Depending on the policyholder's needs, any of these approaches may be used to manage and customize the Aggregate deductible policy.
Footnotes
| Aggregate deductible — recommended articles |
| Period of indemnity — Average clause — Short rate cancellation — Service lease — Floater policy — Interest in possession trust — Guaranteed renewable — Automatic Premium Loan — Prepaid rent — Redenomination |
References
- Amato A.P., (2010), Reference Guide to Reinsurance Reference Guide to Reinsurance 2010 Edition, New York p.18
- Baranoff, E. G. (2010). Determinants in risk-financing choices: the case of workers compensation for public school districts. Journal of Risk and Insurance, New York 265-280.
- Chew D.H., (2008), Corporate Risk Management Columbia University Press, Chicago p.53
- Saled J.A., (2002), Estate Planning Strategies, American Bar Association, London, p.187
Author: Dominika Tatoń
