COOK, HALL & HYDE, INC.

INSURANCE PRIVATE CLIENT SERVICES

Increasing the Cost–Efficiency of Quality Coverage

It is a sad reality that most insurance policies are sold by agents who reduce the cost of coverage,
without also making it clear what coverage is being reduced or eliminated. The accurate words to
describe this false value proposition are not “Lower Cost”, but “Lower Cost for Less Coverage”. Providing
a more consumer centric approach, we help our clients to examine the most cost efficient approach to
structure quality insurance coverage. To do so, we provide our clients with a basic yet seldom offered
cost of coverage analysis. One of the steps in our analysis is shown below.

Finding the Optimal Risk / Reward Deductible:

Essentially, the reward (cost reduction) that carriers provide for accepting the increased risk of a
higher deductible (higher out of pocket costs after a claim) varies in correlation with the cost of coverage.

As shown in the table below, when the cost of homeowners coverage approaches $10,000, the annual
reward for accepting the extra risk of a higher deductible becomes very worthwhile:

Deductible Annual Extra Risk (out-of- pocket Annual Reward True Cost of
Per Loss Premium cost increase after a loss) (Annual savings) Coverage %
$ 500 $10,168 current current .406
$1,000 $9,943 $500 $225 .397
$2,500 $9,268 $2,000 $900 .37
$5,000 $8,143 $4,500 $2,025 .32
$7,500 $7,018 $7,000 $3,150 .28
$10,000 $5,893 $9,500 $4,275 .236

Understanding the Annual “Cost of Risk” as presented above

The annual cost to insure a home with a $2,500,000 replacement cost with “Deluxe” coverage
(in a specific rating territory meeting certain risk criterion) is $10,168 with a $500 deductible
To calculate the cost of risk: $10,168 annual premium ÷ $2,500,000 at risk* = 0.406
(* it should be noted the amount at risk being transferred to the carrier is actually greater than
just the insurable value of the dwelling)
Clearly, the .236 true cost of coverage represented by a $10,000 deductible offers a better value
than the other options shown.

To Summarize: Resist the urge to lower insurance costs by reducing your protection. Instead,
work with a risk advisor who can guide you on making quality coverage more cost efficient.

For more information:

Tim O’Brien, Director, Private Client Services
631-329-7246 or tobrien@chhins.com

OFFICES IN EAST HAMPTON & MELVILLE, NY AND FAIR LAWN, NJ

461 PANTIGO ROAD, EAST HAMPTON, NY 11937 800.966.2665 FAX 631.324.1448