As commercial property insurance rates have climbed steadily in the last five years, insurers have been increasing deductibles, sometimes for all risks, but sometimes for specific perils, such as hail.
Often, business owners fail to notice these increased deductibles until they file a claim. Sometimes, their dollar-amount deductible has been replaced by a deductible that covers a certain percentage of a claim’s value, sometimes as high as 5% to more than 10%.
The result for businesses is that their premiums have climbed, and they now have more skin in the game. But these changes can be costly, particularly ones that are based on a percentage of a claim. Navigating these higher premiums may require some negotiation with the insurer — something we can help with.
One approach is to limit the perils to which the percentage deductible applies. Instead of applying a 5% deductible to all claims, an insurer might apply it only to specific events, such as wind or wildfire losses, while maintaining a flat deductible for other causes like fire or vandalism.
In addition, insurers may apply percentage deductibles only to properties located in particularly high-risk areas (such as coastal counties) rather than to an entire regional or nationwide portfolio.
The deductible buydown
A key strategy emerging to manage rising deductibles is the use of deductible buydowns, also called buybacks.
A deductible buydown is a separate insurance policy that allows a property owner to “buy back” a portion of their large deductible. For an additional premium, the buyback policy kicks in after a covered loss to offset the out-of-pocket amount the business must pay under its main property insurance policy.
For example, if a hurricane causes damage to a factory valued at $100 million with a 5% deductible ($5 million), a buydown policy could reduce that deductible exposure to a much more manageable figure, such as $1 million, with the insurer covering the rest of the deductible in case you have a large claim.
Pros and cons
Buydown coverage can dramatically reduce financial exposure after a large loss without requiring the company to pay prohibitively high base insurance premiums.
In areas highly exposed to natural disasters — such as the Gulf Coast, Florida or the hail-prone regions of Texas — a buydown can make the difference between recovering quickly after a storm or facing devastating financial strain.
However, buydown policies are not cheap. Because the premium for the buydown policy is a sunk cost, businesses must carefully weigh whether the likelihood of a claim justifies the added expense.
In relatively low-risk areas, or for companies with sufficient cash reserves to cover a large deductible, the additional cost of a buydown may not be worthwhile. Also, buydown policies come with their own set of terms and exclusions that must be closely reviewed to avoid coverage gaps.
Which businesses benefit most?
The best candidates for deductible buydown strategies typically fall into a few categories:
- Companies with high-value properties exposed to frequent natural disasters (e.g., resorts, coastal hotels and manufacturing plants in Tornado Alley).
- Businesses with tight cash flows or low cash reserves that would struggle to pay a high deductible after a loss.
- Firms with lender requirements capping allowable deductible amounts.
- Organizations with a significant concentration of properties in high-risk geographies, where natural disasters could trigger multiple losses simultaneously.
On the other hand, businesses with strong balance sheets, low-risk property locations or highly diversified property portfolios may be better off absorbing the risk or structuring their primary insurance policies to limit their exposure through narrower deductible applications.
The bottom line
Buydown coverage is not cheap, costing between 6% and 15% of the insured value, depending on factors like location, property type and peril-specific risks.
You may also be able to purchase a buydown for only specific locations or perils. You can identify sites that may have a higher exposure to a natural catastrophe and purchase buydown coverage for your properties in that area and for the specific peril.
We can help you negotiate language that limits the percentage and the geographic region to which it applies.
Tags: Commercial Property, Leaders' Choice Insurance