Deductibles and excess: buying the right amount of risk

Two words, one idea, and the differences that matter

An excess, called a deductible in many markets, is the first slice of any claim that you pay yourself. If your excess is 1,000 and the repair costs 4,000, the insurer pays 3,000. If the repair costs 800, the insurer pays nothing and you pay the whole 800.

The two words are used interchangeably in everyday speech and the mechanism is the same. Where you will notice a difference is in phrasing on the schedule. Motor and home policies in markets influenced by British practice tend to say excess. Health and international policies tend to say deductible, and often pair it with other cost-sharing terms that behave quite differently. Read the definitions section rather than assuming.

What matters far more than the label is the structure. Two policies with the same headline excess can behave very differently depending on whether it applies per claim or per year, whether it is a fixed amount or a percentage, and whether separate excesses stack on a single event.

Why insurers want you to hold the first slice

An excess is not a penalty and it is not an administrative habit. It does four jobs at once, and each of them lowers the price you are quoted.

1. **It removes small claims entirely.** The cost of investigating, adjusting and paying a claim is largely fixed. Handling a 400 claim can consume a large fraction of the amount itself. Setting an excess above the nuisance threshold deletes that entire category of cost from the book.
2. **It counters moral hazard.** If a loss costs you nothing, you have less reason to lock the door, drive carefully or negotiate the repair price. Keeping you exposed to the first slice keeps your incentives pointed the same way as the insurer's.
3. **It reduces claims frequency more than proportionally.** Small claims are much more numerous than large ones. Removing everything below a threshold removes a large count of claims for a modest reduction in total claims value, which improves the predictability of the book.
4. **It transfers volatility back to you cheaply.** The insurer prices risk with capital, expenses and a margin on top. You price the same slice at face value. So the slice is genuinely cheaper for you to carry, provided you can carry it.

That last point is the reason a higher excess produces a discount larger than the arithmetic of expected losses alone would suggest. You are not just removing expected claims from the insurer, you are removing loaded, capitalised, commissioned claims.

The varieties you will actually meet

Compulsory and voluntary

Many policies impose a compulsory excess that you cannot remove, and then offer a voluntary excess on top which you choose in exchange for a discount. On a claim, they add together. A 500 compulsory plus a 1,500 voluntary means 2,000 out of your pocket before the insurer pays anything. People routinely quote themselves only the voluntary figure and are surprised at claim time.

Per claim, per event, per year

• **Per claim** is the common default. Every separate claim carries its own excess. Three claims in a year, three excesses.
• **Per event** groups losses arising from one incident, which matters when a single storm damages the roof, the car and the garden wall under different sections of a policy.
• **Aggregate or annual** deductibles are more common in health and commercial cover. You pay claims yourself until your cumulative spend reaches the threshold, after which the insurer pays. The distinction is enormous for anyone with recurring claims.

Percentage deductibles

Rather than a fixed sum, the excess is a percentage of the sum insured or of the claim. Home policies in catastrophe-exposed regions often use a percentage of the building sum insured for specific perils. A 2 percent deductible on a 1,500,000 building is 30,000, which is a very different proposition from the 5,000 fixed excess elsewhere in the same document. Percentage deductibles are also common on total-loss and depreciation clauses in motor policies.

Waiting periods, which are deductibles in units of time

Income protection and some health benefits use a waiting period rather than a money amount. A 90 day waiting period means the benefit begins only after 90 days of the insured condition. Economically this is a deductible measured in days of income rather than in currency, and lengthening it discounts the premium the same way. Judge it against how many days of expenses your savings can genuinely fund.

Franchise, the awkward cousin

A franchise looks like an excess but behaves differently. Below the threshold, nothing is paid. Above it, the whole claim is paid including the first slice. With a 1,000 franchise, a 900 claim pays zero and a 1,100 claim pays 1,100, not 100. Franchises appear in travel, marine and some group covers. Check which one you have, because the difference at the margin is large.

Before comparing excesses across two quotes, confirm you are comparing the same structure. A 2,500 aggregate annual deductible and a 2,500 per-claim excess are not the same product with a different price.

The break-even sum, done properly

The naive comparison is straightforward. Take the premium saving from raising the excess, divide it into the extra amount you would pay on a claim, and you get the number of claim-free years needed to break even.

Suppose raising your excess from 1,000 to 3,000 saves 400 a year in premium. You have taken on 2,000 more exposure per claim and are being paid 400 a year for it. Break-even is 2,000 divided by 400, which is 5 years. If you expect to claim less often than once every five years, the higher excess wins on expectation.

That is the calculation most people stop at, and it is incomplete for three reasons.

**First, claim frequency, not claim certainty.** You do not experience "one claim every five years" as a schedule. You experience it as a probability, and probabilities cluster. Two claims in eighteen months is a perfectly ordinary outcome for a risk with a five-year average interval, and it would cost you 4,000 in additional exposure against 600 of saved premium.

**Second, the suppressed-claim adjustment.** With a 3,000 excess you will not claim for a 2,600 repair, so the true comparison is not only about the extra 2,000 on large claims. It is also about the mid-sized claims you would have made under the lower excess and now will not. If you would have claimed once every four years for something in the 1,000 to 3,000 band, add that cost to the high-excess side of the ledger. This is the term almost every break-even comparison omits, and it usually shifts the answer.

**Third, the no-claims discount interaction.** In markets where a claim resets a discount, making a small claim can cost you more in future premium than it recovers. Under a low excess you may still choose not to claim, in which case you paid for cover you did not use. A higher excess with a larger discount can be the more honest arrangement.

A more complete comparison:

1. Estimate your realistic claim frequency for each severity band, using your own history rather than optimism.
2. For each band, work out what you pay under Option A and under Option B.
3. Multiply by frequency, sum across bands, and add the annual premium.
4. Compare totals, then apply the stress test in the next section, which can overrule the arithmetic entirely.

Worked example, two motor quotes side by side

All figures are hypothetical.

Option A. Premium 3,600 a year, compulsory excess 500, no voluntary excess. Option B. Premium 3,000 a year, compulsory excess 500, voluntary excess 2,000, total 2,500 per claim.

The premium saving is 600 a year. The additional exposure per claim is 2,000. Naive break-even is 3.3 years.

Now add bands. Assume from your own history that you have a minor damage claim of around 2,000 roughly once every four years, and a major claim of around 25,000 roughly once every twelve years.

Minor claims. Under Option A you pay 500 and the insurer pays 1,500. Under Option B you pay the whole 2,000 and do not claim at all. Extra cost to you under Option B is 1,500 every four years, which is 375 a year.

Major claims. Under Option A you pay 500. Under Option B you pay 2,500. Extra cost is 2,000 every twelve years, which is 167 a year.

Total extra expected cost of Option B is 542 a year against a premium saving of 600 a year. Option B wins by about 58 a year, which is close enough to be noise.

The conclusion is not "choose B". The conclusion is that this decision is nearly neutral on expectation, so it should be decided on the second question instead: which outcome can you absorb without damage on the worst day? If 2,500 in a single week would force borrowing, Option A is worth the 58 a year and then some. If 2,500 is uncomfortable but survivable from cash, Option B is fine and the saving compounds quietly every year you do not claim.

The claim you will not make

There is a cost to a high excess that never appears in any spreadsheet: the psychological deterrent. Once your excess is high, you start absorbing losses that were genuinely insurable, partly because the paperwork is not worth it and partly because you no longer think of the policy as something that helps with ordinary events.

Sometimes that is exactly the intended outcome and it is efficient. Sometimes it means damage goes unrepaired, a small mechanical fault becomes a large one, or a health symptom goes unexamined. Be honest about which of those you are choosing.

The healthy version of a high excess is a household that has deliberately moved the small stuff into its budget and its emergency fund. The unhealthy version is a household that chose a high excess because the premium was all it could afford, and which will simply not claim.

How much risk can you actually carry

Run this test before you sign anything.

1. **Cash on the day.** Could you pay the full excess within seven days, from accessible savings, without touching money committed elsewhere and without borrowing? If not, the excess is too high regardless of what the break-even says.
2. **Twice, in one year.** Could you do it a second time in the same twelve months? Claims are not spaced politely.
3. **Stacked excesses.** If one event triggers two sections of a policy, or two policies, could you fund both excesses at once?
4. **After the trigger event.** Many claims arrive attached to something else going wrong. Job loss, illness, an accident. Assume the excess falls due in a month when your income is disrupted.

If all four pass, the higher excess is a reasonable trade. If any fail, you are not transferring risk, you are pretending to.

A useful rule of thumb: keep total chosen excesses across all your policies within a modest fraction of your accessible emergency savings, so that a single bad quarter cannot consume the buffer entirely.

When a high deductible is the wrong answer

• **When your buffer is small or committed.** Cover you cannot activate is not cover.
• **When the excess is percentage-based on a large sum insured.** The number can be far larger than it looks in the schedule.
• **When claims are near-certain.** Chronic health conditions, an old vehicle needing repeated work, a property with a known recurring issue. A high excess in a high-frequency situation simply removes the insurance.
• **When the excess applies per item rather than per claim.** Contents policies sometimes do this, and a single burglary can generate several excesses.
• **When a lender, landlord or regulator requires a maximum.** Some contracts cap the excess you may choose.
• **When the discount is trivial.** If doubling your excess saves two percent of premium, you are absorbing real volatility for almost nothing. Decline it.

Health cover uses different words for related ideas

Health policies stack several cost-sharing mechanisms, and they are not interchangeable.

• **Deductible.** A fixed amount you pay before the plan pays anything, often annual and often applying only to certain benefit categories.
• **Co-payment.** A fixed amount per visit or per prescription, for example 25 per consultation, regardless of the bill's size.
• **Co-insurance.** A percentage of each bill, for example 20 percent, which is unbounded unless capped. This is the one that surprises people, because 20 percent of a large hospital bill is a large number.
• **Out-of-pocket maximum.** A ceiling on your total annual cost-sharing, after which the plan pays in full. Not every policy has one, and its absence is a material fact about the plan.
• **Annual and per-benefit limits.** Ceilings on what the plan pays. These sit on the other end of the same bill and are at least as important as the deductible.

In Dubai, cost-sharing arrangements for mandatory plans sit within regulated benefit rules rather than being left entirely to insurer discretion, so the applicable co-payment terms should be read against the current published requirements Source^source. More generally, supervisory conduct expectations require that policy terms, including the portion of a loss you retain, are disclosed clearly enough to be understood before purchase Source^source. In the UAE, insurance terms including motor policy wordings sit within a supervised framework, so confirm the current arrangement against the policy document and the regulator's published position rather than against any summary Source^source.

A checklist before you change anything

1. Find every excess in the policy, not just the headline one. List compulsory, voluntary, per-section, per-item and peril-specific figures.
2. Confirm the structure. Per claim, per event or aggregate. Fixed or percentage. Excess or franchise.
3. Get quotes at three excess levels from the same insurer, so you can see the actual discount curve rather than assuming it is linear. It is usually not; the discount often flattens after a point, which is where you stop.
4. Do the banded break-even, including the suppressed-claim term.
5. Run the four-part cash test.
6. Check the no-claims discount rules and whether small claims are worth making at all under the option you choose.
7. Write the chosen excess amounts on the same page as your emergency fund balance, and revisit both once a year.

The goal is not the lowest premium and it is not the lowest excess. It is the largest amount of risk you can genuinely absorb yourself, sold back to you as a discount, with the part that would actually break you still sitting with the insurer.

This article is general financial education. It is not advice about your circumstances and does not recommend any insurer, policy or level of excess.