Buyers wrestle with deductible changes despite easing property insurance rates

Despite moderating commercial property insurance market conditions, property owners continue to assume more catastrophe risk through percentage deductibles, but there are steps they can take to mitigate the impact.

As insured losses from hurricanes, floods and severe convective storms continue to rise, policy wordings should be reviewed, and property owners should look to narrow the scope of deductibles, experts say.

Percentage deductibles, which insurers apply to catastrophe perils such as hurricanes and earthquakes, have more recently expanded to include wind and hail coverage. Percentage deductibles often mean that policyholders retain more risk than they would with a flat dollar deductible.

From 2019 to 2023, percentage deductibles rose significantly as rates tripled or quadrupled, said David Pagoumian, president of the Red Bank, New Jersey, office and property practice member at CRC Group.

“In a hard market, deductibles could reach 10% compared to 2% in a soft market,” Mr. Pagoumian said. Deductibles are often lender-driven and can be managed through deductible buydown policies, he said.

Lenders may not accept a deductible higher than 2% or 3%, so property owners turn to deductible buydowns to manage their property program costs.

The market has since stabilized and percentage deductibles have reduced, but they are here to stay, Mr. Pagoumian said.

Buyers should review the policy language for all locations and explore options for deductible buydowns — where they pay a higher premium in return for a lower deductible — and parametric insurance to minimize the impact of percentage deductibles, experts said.

Buyers should consider a deductible buydown policy on individual perils, said Jeff Buyze, Orlando, Florida-based vice president and national property practice leader at USI Insurance Services LLC. Parametric insurance, which pays out based on an agreed trigger — such as wind speed — rather than a traditional claim, can also help by providing broader coverage and faster claim processing, especially for large exposures, he said.

Deductible buydowns allow buyers to reduce the percentage deductible to a more manageable flat dollar amount. Buydown options typically cost 6% to 15% rate on line, or 6% to 15% of the amount being bought down, Mr. Buyze said.

“When you’re looking at a buydown, you don’t have to buy it across your entire schedule. You can pinpoint which locations you want to buy it based on how much you want to retain,” he said.

For instance, if a group of locations is exposed to the same peril and could be affected simultaneously it may make sense to get a buydown for that peril for all locations, but if only a few locations are exposed the buydown could be narrowed, he said.

“There are different ways to structure it, so the cost is more palatable,” Mr. Buyze said.

Risk professionals should closely review policy terms and definitions, especially around what constitutes a “severe” event, to better understand the implications of percentage deductibles, said Penni Chambers, Dallas-based senior vice president of risk management at real estate developer Hillwood, a Perot company, and board secretary of the Risk & Insurance Management Society Inc.

“Severe is rarely defined in the policy terms because with convective storm we all know that’s more or less a tornado, but what is severe? Is that EF2, is that EF5, is that winds over 100 miles an hour?” Ms. Chambers said.

“Risk managers have a great opportunity to dig down deep into their policy terms and negotiate things like that, as it pertains to that percentage deductible,” she said.

For many years, percentage deductibles applied just to wind and earthquake, said Duncan Milne, New York-based head of U.S. property at McGill and Partners. But in recent years, they have been applied to events beyond traditional catastrophes, such as hail events, he said.

Insurers have also increased the percentage amounts for certain perils, particularly for Florida windstorm.

In today’s market, policy language options are abundant, Mr. Milne said. Buyers should work with their broker to negotiate language that limits the percentage and the geographic region to which it applies, he said.

Limiting the number of perils to which the percentage deductible applies is another option. “Have your flat dollar all other perils deductible applied to as many perils as possible,” Mr. Milne said.

“If you have a national schedule, you could limit the percentage deductible to certain states or zip codes and in the case of hurricanes to a Tier 1 definition,” meaning the percentage deductible would only apply to properties located in certain coastal counties, Mr. Pagoumian said.