Deductible buy-back

A deductible has two functions: to screen out small claims whose handling cost would exceed their value, and to leave the insured part of the risk as an incentive to be careful. A deductible buy-back partly undoes the second effect, for a price. It takes two forms. In the first, the primary insurer offers an option reducing or removing the deductible for an extra premium: this is the case in motor insurance or vehicle rental contracts. In the second, another insurer sells a separate policy reimbursing the deductible left to the insured by the main contract: rental excess insurance, buying back the natural catastrophe deductible for a company, or, for large accounts, cover of the retention in a specialty market. The product is often priced high relative to the actual risk, because it attracts insureds who expect claims and because handling costs weigh heavily on small amounts. It also raises a moral hazard question: an insured who no longer bears any deductible loses an incentive to prevent losses. In corporate programs, a deductible buy-back must be coordinated with the retention strategy: buying back a deductible the captive was meant to carry means paying twice for the same layer.