Deductibles in response to Andrew

• By TED GRIGGS
• Advocate business writer
• Published: Jul 14, 2008 - UPDATED: 12:05 a.m.

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Hurricane and windstorm deductibles have been around since the mid-1990s.

Eighteen states and the District of Columbia have the deductibles, which range from 1 percent to 25 percent in the highest-risk areas, according to the Insurance Information Institute, an industry-funded group.

The deductibles were largely a response to Hurricane Andrew in 1992, said Robert Hartwig, president of the institute.

Property insurers paid $15.5 billion in claims from Andrew, four times more than the most expensive storm up to that point.

The losses forced the industry to take another look at its storm-modeling programs and to re-examine residential development patterns.

It turned out that homeowner’s firms were much more vulnerable to enormous weather-related losses than previously thought, Hartwig said.

Reinsurance companies, which insure insurance companies against excessive losses, didn’t want to provide coverage to some of the largest homeowner’s firms.

To get reinsurance, the homeowner’s firms had to reduce their potential losses from wind and hailstorms, which meant shifting some of the risk to policyholders, Hartwig said.

Insurers did so by switching to percentage deductibles. With traditional dollar deductibles, the policyholder is responsible for a set amount of money.

A policy with a $500 deductible means the policyholder pays the first $500 of the claim out of pocket.

With a hurricane deductible, the portion of the damage the homeowner must cover depends on the home’s insured value.

For example, a 2 percent deductible on a $200,000 house means the homeowner has to cover the first $4,000 in damage.

“The first time they were triggered in large numbers was really in 2004, mostly in Florida,” Hartwig said.