In credit insurance, a deductible is the amount of loss you are responsible for paying out-of-pocket before the insurance coverage kicks in. Here’s how it works:

• How it Functions

  • Loss Occurs: Your customer becomes insolvent or defaults on payment for an extended period as defined in your policy.
  • Deductible Applied: You are responsible for covering the first portion of that loss, up to the amount of your deductible.
  • Insurance Coverage: Once your deductible is met, the credit insurer pays out the remaining covered portion of the loss.

• Example:

  • Your policy has a $10,000 deductible.
  • A customer defaults on a $50,000 invoice.
  • You would pay the first $10,000 out-of-pocket.
  • The insurer would then cover the remaining $40,000 (minus any co-insurance percentage that may apply).

• Why Deductibles Exist

  • Shared Risk: Deductibles create a shared risk model between you and the insurer, discouraging frivolous or minor claims.
  • Moral Hazard: They help prevent situations where businesses might be less diligent in their credit decisions if they have full coverage.
  • Premium Reduction: Higher deductibles generally lead to lower insurance premiums.

• Variations in Deductibles

  • Deductibles can be a fixed amount or a percentage of the covered loss.
  • Policies might have different deductibles for different types of risks (commercial vs. political).
  • Some policies have a concept of an annual aggregate deductible, where you bear a certain amount of overall loss across all claims before coverage begins.

Important Note: The size of the deductible is a significant factor in determining the cost of your credit insurance premiums. Carefully consider the trade-off between a lower deductible (more immediate coverage) and potentially higher premiums.