If you missed yesterday’s post, you may want to start there to get the background.
So yesterday, I made the case that there is a problem with how insurance buyers are given poor advice and end up with expensive low deductibles that often aren’t in their best interest.
I’m sure a number of you said, there he goes again, telling us about everything that’s wrong without any plans to fix it. Au contraire!
Today, I introduce you to a solution. The world’s first calculator that helps you find a better deductible for your home insurance. (You can try it for yourself here).
In the example below, I’ll show how you can save almost 25% by raising your deductible in a low risk way. Forget needing 15 minutes. This can save you 15% in 1.5 seconds!
Now, I’ll have a lot of disclaimers as we go, principally this is version one and it admittedly makes some simplifying assumptions.
We will be working on much more advanced versions over time, but the first priority was to show people the simplest explanation we could for why this is in their best interest, before introducing complicating factors.
By the way, once we introduce those other factors, they will point you to selecting even higher deductibles then we suggest today. In other words, this is truly a conservative version we are demonstrating here.
Find A Better Deductible Instantly
First, let me tell you what it does is and then I’ll explain how it works. You can see a sample output below:
Basically, you tell us your current premium and your current deductible and we solve for a higher deductible that saves you money even if you have a claim within the next ten years.
It’s really that simple. If you have no claims, you will pocket that savings every year.
If you have a claim once every ten years (recall from yesterday, average claims frequency is only 6%), our answer saves you more in the nine years without a claim than you “lose” from having to pay a higher deductible in the tenth year (see the table below).
If you have two or more claims over ten years, you will be worse off. However, you are about 5X more likely to have no claims than two claims and our answer saves you more in the 0 claim case than you lose in the 2 claim outcome (so the expected value is way better), as you can see below.
Assumes $1700 premium and increase deductible from $1000 to $5000:
| # of claims | 10 Year Premium Savings | Increased Retention | Net “Win” |
| 0 | $4029 | $0 | $4029 |
| 1 | $4029 | $4000 | $29 |
| 2 | $4029 | $8000 | -$3971 |
Note, our estimates of savings are based on a sample of rate filings from well-known insurers. Clearly, if you have a different provider or you live in a state with different frequency patterns, your result may differ, but it should be fairly close.
Attractive Risk vs. Reward
By the way, $1700 is about the national average for homeowners premium and $1000 is the most common deductible, so the average insured could easily save 20% by carrying a more efficient deductible.
While I don’t want to give away all our math, we estimate slightly more than half of homeowners will have no claims over a ten year period, while a bit more than a third will have one. We forecast about 10% will have two claims and a very small percent have three or more.
That means nearly 90% of the time you come out ahead to some degree and over half the time you come out ahead by a lot.
(FYI, if anyone wants to share with us long term claims frequency that is more accurate, please reach out and I’d be happy to review.)
The key takeaway is, if you can afford a higher deductible, we can find you one that is very highly in your favor.
You may want to pick one even higher than we suggest if you are willing to accept a little more tail risk and would like to maximize the expected value.
If so, we can help with that offline, but again, we are starting out with a simple decision tree of let’s make things better than what you have, rather than let’s solve for the absolute optimal outcome.
Future Improvements
To give you a sense of the conservatism embedded in our estimate, we give no credit for any of the following factors, all of which would point you to carry an even higher deductible:
- you may not even file for a small claim, in which case your deductible should be higher
- if you file a small claim (because your deductible is low), your rate will likely increase
- an accident forgiveness benefit has more value with a higher deductible than a lower one
- a claim in the future should be discounted for the time value of money
- premiums (and thus your future savings) rise over time while your deductible doesn’t
- if you have a claim, your renewal rate increase in $ will be higher with a low deductible than a high one
- if you have two or more claims, you have a greater risk of being cancelled
In other words, we’ve very much undersold the benefits of the recommended deductible for now.
If we just removed the constraint that you come out ahead at one claim in ten years to instead focus on expected value, that alone would raise the ideal deductible substantially.
Honestly, we wouldn’t be promoting this if it weren’t truly a no-brainer. It’s such a layup and it’s, frankly, stunning that more people don’t know to do it.
How You Can Help
For starters, go to the link and try it out for yourself. Then, send us any questions at calculator@informedinsurance.com. Get an updated quote from your carrier and, to the extent it differs from our projection, we’ll re-run the analysis for you. Put us to the test!
Beyond that, obviously tell others who you know that you think could benefit and are maybe more likely to be sitting on a $1000 deductible and can afford more.
We are also looking to raise awareness with people who give financial advice, starting with personal lines agents but also mortgage brokers, financial planners, etc. Feel free to share with any connections you have or make an introduction.
The tool is free, so anyone can use it and we can answer any follow up questions at that email above. We’re trying to make people smarter insurance purchasers, so the more people that find this helpful the better.