By Autumn Cafiero Giusti
In theory, the amount you set for your auto insurance deductible should dictate how much money you’re willing to pay out of pocket before letting your auto insurance foot the bill, and that would be the end of the story.
But filing a claim can set in motion a chain of events that could prompt your insurer to raise your rates or even drop you altogether.
So for some consumers, there’s a bit of grey area between their stated deductible amount and the price they’re actually willing to pay to avoid having to file an insurance claim. It’s a concept some insurance researchers call the “pseudodeductible.” And
understanding this hidden deductible can help consumers set a more accurate stated deductible, and potentially save on their insurance premiums in the long run.
“People try to avoid uncertainty. That’s why you buy insurance. But when these losses happen, it creates another uncertainty: What’s going to happen to my premium when I report this claim? So it’s a balancing act between the loss itself and how it will affect the future premium,” says Dana Kerr, Ph.D., associate professor of risk management and insurance at the University of Southern Maine. Kerr authored a 2012 study on pseudodeductibles and is one of the few researchers studying the phenomenon.
If a consumer has a $500 deductible but $800 in damages, that person might be willing to pay the full $800 and leave $300 on the table, rather than file a claim for $500 and risk having their premium go up. “They’re willing to eat that cost if it gets rid of the uncertainty of what the reporting of that loss might have on their future premium,” Kerr says.
Kerr found that as a consumer’s loss gets larger in terms of dollar amount, that person is likely to be less selective about which claims to report.
“At a certain threshold amount, it’s too big, where now the greater uncertainty shifts from the loss itself and what you have to pay out of pocket, to the effect your loss is going to have on your future premium cost,” Kerr says.
People with losses of more than $1,000 were more selective than the people with total losses of less than $1,000, according to the report.
Kerr’s study also found that women and adults under 55 tend to be more selective about whether to file a claim. The same goes for individuals who have prior accidents on their records. “There are different levels of risk aversion for different types of people,” Kerr says. “The pseudodeductible effect ebbs and flows with the nature of your loss experience.”
Liability can be a game changer in terms of making a person more likely to file a claim. If you’re held legally liable for another person’s damages, the costs – though uncertain – could be significant and include pain and suffering.
“When you get into a liability situation, people aren’t going to be very selective at all. The pseudodeductible effect is going to be very small. Most people probably realize the potential loss they might receive for a liability claim could easily exceed whatever increase they’re going to receive in their insurance premium,” Kerr says.
Collision repair veteran Patrick Yurek believes some consumers are so afraid of filing an insurance claim that they’re inadvertently costing themselves more money.
Yurek owns body shops in Phoenix and Tuscon and is president of Phoenix-based Collision Consulting, a diminished-value appraisal company. He often sees customers with $500 deductibles who are willing to spend on the order of $2,000 out of pocket because they don’t want to file an insurance claim.
“People typically are willing to spend four times their deductible,” he says.
Yurek says customers simply aren’t doing the math on how much they’ll pay up front versus how much a premium increase might actually cost them.
“If your premium goes up $100 a year on a $2,000 claim, it will take 20 years before you break even. You’re better off letting your rates go up,” he says.
Yurek says he advises his customers to strongly consider filing a claim instead of shelling out thousands of dollars up front.
“They prepaid for this coverage. If they have an accident, I always tell them to file,” he says.
Insurance agent Bill Montgomery, CIC, agrees that it’s important for consumers to do the math on their insurance costs, but that the math is only part of the overall picture.
“It’s the impact it has on your insurance program entirely,” says Montgomery, who owns Insurance Works for You in Dayton, Ohio, and has been featured as an industry expert on InsureBlog.com.
Consumers need to look at whether they have speeding tickets, a DUI or other factors that could cause their insurer to raise their rates or even cancel their policy.
“The math should only be a partial consideration here. It’s not whether it makes sense to save money. It’s whether it makes sense to keep your insurance program in good standing,” Montgomery says.
But as long as it makes sense for the consumer, Kerr says that people should try to make their pseudodeductible as consistent as possible with their stated deductible. “If they think they can financially absorb the loss out of their own pocket, then they should move up their deductible and at least get the benefit of that premium reduction,” he says. “Otherwise they’re not benefiting from the lower premium they could be getting.”