Taking on higher deductibles and retentions may sound like an excellent way to save your dealership some serious premium dollars. But is that always the case?
The auto dealership insurance marketplace continues to be a vigorous one with more carriers scheduled to enter the market in the months to come. They will try to differentiate themselves with premiums, coverages and deductible programs. One thing to remember is that most insurance companies don’t make most of the profits by selling insurance. They make money by investing your premium dollars from the time you pay the bill until a claim is paid. If there’s some left over, all the better. Therefore, insurance companies have a disincentive to give you a premium discount worthy of the risk you are taking. When taking on risk, some insurance companies may offer deductibles, some may offer retentions and others a combination of the two. Both have details you need to be aware of.
A large deductible plan is what it sounds like. You will pay or absorb a large deductible of $2,500 to $10,000 or more for each and every claim. The insurer may put an aggregate cap on the amount of deductible expense in a policy year. The cap however, will be higher than the retention plans discussed later. It is important to take a hard and realistic look at your losses. If you have had a high frequency of losses, don’t assume the trend will improve unless you have taken aggressive steps to reverse the trend. For dealers who already operate under a large deductible plan, don’t assume it will always be the most cost effective way to go. Getting bids from competing fixed cost programs is always advisable, especially in the improving insurance environment which we now find ourselves. Needless to say, the price of the fixed cost program should be compared to your large deductible plan premium plus the funds you have paid in deductible costs.
Different carriers have different comfort levels with different deductible levels. Do not get stuck thinking the deductible level you’ve chosen is “right” or the most cost effective today because it was a couple of years ago. A long term client has for many years carried a $25,000 liability deductible and it has worked well. During this year’s bid process, one carrier offered a $10,000 deductible at the same price as the other carriers’ $25,000. When asked how much of a premium reduction we would get by raising the deductible to $25,000 we were told “none, we won’t go that high.” The dealer took the $10,000 deductible. It pays to be flexible.
As it relates to your auto inventory, look carefully at the “wind/hail” or “weather related” deductibles. We see more carriers offering weather deductibles. Why is this important? When it comes to “wind/hail” deductibles you most probably have a much higher aggregated deductible than for other causes of loss. If your policy has a “weather related” deductible instead of “wind/hail” this means that flood is included with the higher aggregate. In the right circumstance, this nuance could cost you quite a bit of money.
Retention plans may be better for the dealer or dealer group that is uncomfortable with the more open ended risks associated with large deductibles. In a retention program, you will have deductibles similar to that of a fixed price program. You will pay the deductible then you will be responsible for the rest of the claim up to the aggregate retention limit (usually between $25,000 and $50,000). You could pay out the entire retention limit with one claim. Leaving auto inventory in a retention plan does increase the probability you’ll meet your retention limit. Once the retention limit is met, the plan acts just like a fixed cost plan.
It can be confusing to compare a retention program to a fixed cost program. Let’s assume you receive two bids, one is a fixed cost program with a premium of $200,000 and the other is a retention program with a $50,000 retention and a premium of $170,000. Simply put, this means that if you have no losses you will pay $170,000, but in addition you will pay for your losses up to $50,000. You could pay as much as $220,000 if you have losses during the year. At this point you are betting a $30,000 possible gain against a possible $20,000 loss when compared to the fixed cost plan. You need to look carefully at your losses. If you average $30,000 a year, which is still quite good for an account this size, then you’re back up to $200,000 ($170,000 premium plus $30,000 of losses) so you would have to wonder if this is a good deal for you? On the other hand, if your losses are much lower, maybe it’s worth the bet.
All the same principles apply when looking at a large deductible plan. The difference between the retention and large deductible in this scenario is that the retention can be consumed in one claim where with a large deductible it will take a number of claims to reach the aggregate. Both retention and large deductible plans come with significant risks requiring you to take a realistic appraisal of your loss history to make the best decision. Bidding your coverage each year is the only way to be certain your dealership has best coverage at the lowest possible cost, especially in this improving market.