How insurers price deductible credits: the logic behind the discount

Moving from a $500 to a $1,000 deductible saves a different amount for you than for your neighbor because the discount is not a flat percentage. An insurer asks how many of the claim dollars it expects to pay would disappear under the higher deductible, then prices that share out of the collision or comprehensive premium. That share depends on the size of claims for your kind of car in your kind of place, and the dollars saved depend on how large your premium was to begin with.

The mechanics are mostly actuarial arithmetic, and they are not secret. This article walks through the standard method, uses invented numbers to show it, and ends with how to get a quote screen to show you the whole menu. The figures in the worked examples are hypothetical and chosen for easy math; they are not market data.

What a deductible credit is

A deductible credit is the reduction in the price of physical damage coverage (collision coverage and comprehensive coverage) that comes with choosing a higher deductible. In the insurer's rating plan it is usually a multiplier, called a relativity or factor, applied alongside the other rating factors: territory, vehicle, driver, and so on. A factor of 1.00 is the base; 0.85 is a 15% reduction relative to the base; 1.45 is 45% more than the base.

Insurers choose one deductible as the base. The Casualty Actuarial Society's text Basic Ratemaking (Werner and Modlin, fifth edition, 2016) uses a personal auto example in which the base risk for collision has a $500 deductible, and explains why a company might do that: even if it has more policyholders at $250, it wants new customers steered toward $500 or higher, so when a shopper asks for a $250 quote, the higher premium "may serve as a psychological deterrent." The base deductible is a business decision as well as a technical one, which is why quote screens often open on a particular default.

Only the physical damage coverages get a deductible credit. Liability coverage pays other people's losses and has no deductible in a standard policy, so the credit does not touch that part of the premium. See how car insurance rates are calculated for how the pieces combine.

The loss elimination ratio

The actuarial building block is the loss elimination ratio, or LER. The CAS text defines it as the losses and loss adjustment expenses eliminated by a deductible divided by total ground-up losses and expenses, where "ground-up" means the full size of each claim before any deductible. If a $1,000 deductible removes 25% of expected claim dollars, its LER is 0.25.

Under a simplifying assumption that all expenses and profit are a constant percentage of premium, the text gives the indicated deductible relativity as 1.0 minus the LER. A deductible that eliminates 25% of expected losses points to a factor of 0.75.

To compute the LER you need a loss distribution: how many claims of each size happened. The CAS text gives the formula for known ground-up losses: for each claim, the insurer saves the smaller of the deductible or the claim, so the eliminated losses are every claim under the deductible in full plus the deductible amount for every claim above it. Divide by total losses and you have the LER.

A worked example with invented claims

Say an insurer studies 1,000 collision claims for a group of similar cars. The claim sizes are made up for the example:

With a $500 deductible, the $300 claims vanish completely, and each larger claim is reduced by $500. The insurer pays $2,830,000, so the deductible eliminated $470,000, an LER of 14.2%. With a $1,000 deductible, both the $300 and $700 claims vanish, and the larger ones lose $1,000 each; the insurer pays $2,450,000, an LER of 25.8%.

The factor for $1,000 compared with $500 is therefore $2,450,000 divided by $2,830,000, or 0.866. Moving up one step cuts the physical-damage premium by about 13.4%, not 25.8%, because the $500 deductible was already doing part of the work. Extending the same table to the other common choices gives these factors against the $500 base:

Notice that each column is the product of the same arithmetic rather than a rule of thumb. If the claims had been different, so would the factors.

Why the curve flattens

Look at what each step buys per $100 of extra deductible in the table above. Going from $250 to $500 lowers the price from 1.08 to 1.00, about 3.1 points per $100 of added deductible. From $500 to $1,000 the drop is 13.4 points over $500, about 2.7 points per $100. From $1,000 to $2,000 the drop is 21.2 points over $1,000, about 2.1 points per $100. Each extra dollar of deductible removes less than the one before it.

The reason is that the first dollars of the deductible apply to every claim. Almost all claims, including the small ones, give up the first $250. Only the larger claims give up the dollars between $1,000 and $2,000, and the number of claims that large is smaller. Each added slice of deductible therefore eliminates fewer claim dollars than the slice below it. This is a direct result of claim sizes: small claims are common and large ones are rarer.

What a real filed table looks like

A real rating manual shows the same pattern with less tidy numbers. A Nebraska personal auto manual administered by Farmers Mutual Hail Insurance Company of Iowa (the page in question is marked 10-1-22) tells the user to charge the following percentages of the $500-deductible collision premium when no premium is shown for a deductible:

Moving from $250 to $500 takes 45 points off. Moving from $500 to $1,000 takes off 15. Each $500 step after that is worth 13, 10 and 8 points. The manual's comprehensive table is lumpier (135%, 100%, 79%, 63%, 60%, 40% for the same deductibles), which is what happens when the factors come from real data and judgment rather than a formula. This is one small program's manual, written for its own book of business. It is an example of the structure, not a benchmark for any national insurer.

How the factors reach regulators

Deductible factors are part of the rating manual an insurer files with the state. The CAS text describes the manual as having rules, rate pages and rating algorithms: the rate pages hold the base rates, rating tables and fees, and the algorithm says how to multiply them together. A deductible table is one of those rating tables.

Insurers submit those filings electronically through the NAIC's System for Electronic Rates & Forms Filing. The NAIC's SERFF page describes it as the platform for submitting rate and form filings to states and says SERFF Filing Access gives the public online access to publicly available filings. What a state requires after the filing is submitted varies: some states require approval before the rates are used, others allow use first and review later. how car insurance rate approval works covers the differences, and How to read a car insurance rate filing on SERFF shows how to look for a deductible table in a specific filing. Where the filing is public, you can compare an insurer's factors with the percentages above, though a filing exhibit can be dense; reading a rate filing to see how big a discount really is explains how to read one.

Regulators generally ask whether rates are adequate, not excessive and not unfairly discriminatory, and the support for deductible factors, which may include a loss-elimination analysis like the one above, can be part of what an insurer submits. Rules differ by state, so the state insurance department is the place to ask what it requires.

Why the discount depends on the car and the area

The same arithmetic produces different answers for different groups of cars, which is the point of the question that started this article. Two things change: the share of claim dollars a deductible removes, and the premium that share is applied to.

Claim size shifts the share

A deductible removes a fixed number of dollars from each claim. If claims in a group tend to be small, a larger fraction of the group's claim dollars disappears. If claims tend to be large, the same deductible is a smaller fraction.

Say Car A is an older, inexpensive car. Because an insurer generally pays no more than the car is worth, its claims top out near the car's value. Car B is a newer, expensive car with a few very large claims. Using made-up claim tables for 1,000 claims each, the older car's $1,000 factor against the $500 base comes out at 0.807, a 19% cut, and the newer car's comes out at 0.925, a 7.5% cut. The deductible is the same, and the percentage discounts are far apart.

Dollars depend on the premium

Percent is not what you keep. Suppose Car A's collision premium at the $500 deductible is $400 and Car B's is $1,270 (invented, but in proportion to their expected claim costs). A 19.3% cut saves Car A's owner about $77; a 7.5% cut saves Car B's owner about $95. The newer car's owner gets a smaller percentage and a larger dollar saving. That is why a neighbor with a different car can see a different saving from the same change, and why a quote showing only the percentage can mislead.

Area and the vehicle rating symbol

Territory changes claim frequency and cost: dense areas have more parking-lot and low-speed claims, hail regions have clusters of mid-size comprehensive claims, and repair labor rates differ by location (see labor rates and paint costs: why the same repair has different prices). A car's vehicle symbol groups models with similar loss experience. Some rating plans apply one table of percentages to each vehicle's own $500 premium, as the Nebraska manual does for deductibles with no premium shown, while others may vary the factors by vehicle group, age or territory. You cannot tell from outside which approach an insurer uses; a filing or a quote at each deductible tells you.

Why the premium falls by less than the claims removed

If a deductible eliminates 14% of expected claims, the rate does not fall by 14% of the entire premium. There are several reasons, most of which the CAS text describes.

Fixed expenses

The simple relativity formula assumes expenses and profit are a constant percentage of premium. In practice, some expenses are fixed regardless of premium. The CAS text gives the example of the cost of issuing a policy, and says a company may include an explicit expense fee in the rating algorithm, or may fold all expenses into the base rates. A deductible does not reduce the cost of issuing a policy, so the credit applies only to the part of the premium that moves with losses.

Using the earlier table, say a $500-deductible collision premium is $600, of which $60 is fixed expense that does not change. The other $540 moves with expected losses, so going to a $1,000 deductible gives $540 multiplied by 0.866, or about $467, plus the $60, for roughly $527. The saving is about $73, against about $81 if the whole $600 scaled. The ratio of expenses to premium (expense ratio) therefore matters to how much of a deductible's value reaches you.

Claim behavior is not constant

The LER method assumes a policyholder reports a $1,100 loss whatever the deductible. The CAS text says that is not realistic: the same insured who would file under a $250 deductible might not file under a $1,000 deductible, because a small net payment may not be worth a possible surcharge. It also notes that when buyers choose their own deductible, lower-risk insureds tend to choose higher ones, so higher-deductible policies may end up more profitable than the LER alone would suggest. The text says an analysis that groups experience by deductible, rather than using LER, will reflect these differences, and an actuary may look at both sets of indications before selecting final factors.

This behavior is the real-world link between pricing and the decision to file. See claims just above your deductible: the true cost of filing for the claimant's side.

Companies choose, not just calculate

Indicated factors are inputs to a decision, not the decision. An insurer's actual factors come from its own data, its competitors, its marketing goals and what it can justify to the state. The same $500-to-$1,000 move can save more with one insurer than another for reasons that have nothing to do with you.

How to make a quote engine show you the options

Most quoting tools open on one default deductible. A fair comparison needs the same coverage at several. A short procedure:

1. Get a complete quote at the default, and write down the collision and comprehensive premiums separately if the tool shows them.
2. Change only the collision deductible and recalculate. Record the new total, then change only the comprehensive deductible and record that. Changing both at once hides which one is doing the work. See setting different collision and comprehensive deductibles on purpose.
3. Try at least three levels, such as $500, $1,000 and $2,000, so you can see the curve flatten rather than assuming a straight line.
4. If the tool shows only totals, ask the agent or the chat service for the physical damage portion at each deductible.
5. Check that nothing else changed: same limits, same drivers, same discounts, same payment plan.
6. Divide the saving by the extra deductible you would carry. If $1,000 to $2,000 saves $90 a year, the extra $1,000 of risk would take eleven years of claim-free driving to repay in premium savings alone.

The deductible break-even calculator and car insurance quote comparison worksheet organize the numbers. Compare each step's saving to the cash you could actually pay after a loss; how to choose a deductible: $500 vs $1,000 and beyond covers that decision, very high deductibles ($2,500 to $5,000): who they suit covers the far end, and changing your deductible mid-policy: premium effects and claim timing covers timing.

Questions to ask the insurer

• Is the deductible credit the same for every vehicle, or does it depend on vehicle group, age or territory?
• What is the physical damage premium alone at $500, $1,000 and $2,000?
• Does a deductible change affect any discount or fee I now get?
• Is there a surcharge for claims, and does it apply to claims under the new deductible?

Common questions

Why does my quote barely change when I raise the deductible?

Several things can shrink the saving: a low physical damage premium on an older car, a high share of fixed expense, or a rating plan that gives a modest factor. If the premium for collision is small to begin with, even a large percentage cut is a few dollars.

Is a higher deductible always cheaper per dollar of risk?

No. Each extra slice of deductible is worth less than the previous slice, as the tables above show. Past some point you are taking on a lot of risk for a small price reduction.

Can an insurer charge more for a lower deductible than the table says?

In states that require rate filings, insurers must charge according to their filed rating plan, and how closely the regulator reviews it depends on the state. Ask the insurer for the filed factor or search the public filing if your state posts filings.

Do deductibles affect liability premiums?

In a standard policy, no. They apply to collision, comprehensive and certain other first-party coverages, not liability. The deductible choice only changes the physical damage part of the bill.

Why do two insurers offer different discounts for the same change?

They use different loss data, different expense structures, different base deductibles and different rating plans, and each has its own business reasons for pricing the options as it does.

Key takeaways

• A deductible credit is priced from the share of expected claim dollars the deductible eliminates, a ratio actuaries call the loss elimination ratio.
• The credit comes off only the collision and comprehensive premium, and it is smaller than the claims removed because some expenses are fixed and claim behavior changes.
• The curve flattens: each extra slice of deductible removes fewer claim dollars than the last, so the biggest savings come from the first steps up.
• Your saving differs from a neighbor's because claim sizes, premium levels and filed factors differ by car, area and insurer.
• To see your own curve, quote at three or more levels, change collision and comprehensive separately, and divide each saving by the extra risk you would carry.