Almost all conversations about deductibles start badly, because they start with the premium. The useful way to approach them is the other way around: what loss can the company absorb without being affected, and what is it willing to pay not to absorb the rest.
Separate frequency from severity
Frequent and small damages are a predictable operating cost: they can be budgeted. Rare and large damages are the ones that can compromise the company: they are the ones that need to be transferred. A well-constructed programme retains the former and insures the latter, because paying a premium for the predictable means also paying the insurer's management expenses on something whose amount you already knew.
The numbers that need to be put on the table
The claims history of the last five years, sorted by amount. It is used to calculate how many claims per year would fall below each excess level and how much they would total. This amount, compared to the premium savings offered by the insurer for that level, provides the answer. If the savings do not comfortably exceed the expected retention, increasing the excess is simply assuming risk without compensation.
The limit is set by cash flow, not savings
Even if the numbers work out, the excess cannot exceed what the company can pay without resorting to financing in the worst imaginable year, not in the average year. This is where an annual aggregate excess protects: an amount is retained per claim, but with a cumulative cap for the year, so that a bad streak does not become a cash flow problem.
The types worth knowing
Simple excess, which is always deducted. Conditional excess, which disappears if the damage exceeds a certain threshold. Time excess, common in loss of profits, expressed in days of downtime and not in euros. And event excess versus claim excess, a crucial distinction when the same event, a storm for example, causes damage in several locations at once.
