Stormy Weather: How Wind and Hail Deductible Buydowns Protect Insureds

In recent years, the insurance industry has faced mounting challenges due to the rising frequency and severity of storm losses. Recently, Swiss Re released a report stating that global insured losses from natural catastrophes hit $60 billion in the first half of 2024 — and severe thunderstorms or severe convective storms (SCS), mainly in the US, accounted for 70% of that figure.*

SCSs are characterized by strong winds (including tornadoes), hail, lightning and heavy rain. In the US, 12 storms each caused losses of $1 billion or more, according to the Swiss Re report.

For property owners, the financial cost of these storms has been impacted by changes in insurance policies, particularly the introduction of percentage deductibles for wind and hail damage.

"As these deductibles become more prevalent, insureds are increasingly turning to Wind and Hail Deductible Buydown policies to protect their balance sheets and mitigate unexpected costs," says RPS producer Jeff Less.

Understanding the Shift in Property Insurance

Traditionally, Property insurance policies had standard, flat deductibles that ranged from $1,000 to $10,000 for all types of perils, according to Less.

"However, as storms have become more severe and frequent, insurers have faced unprecedented losses on their Property lines, leading them to reevaluate their coverage terms and conditions. As a result, carriers have introduced percentage-based deductibles for wind and hail coverage," he says.

Impact of Percentage Deductibles

These deductibles are calculated as a percentage of the property's total insured value (TIV). For instance, a 1% deductible on a $10 million property would result in a $100,000 deductible, a far cry from the traditional flat deductibles of $1,000 to $10,000. This shift poses a significant financial risk to property owners, particularly in regions like the Midwest, where such deductibles were previously uncommon.

"Ten years ago, wind and hail deductibles were virtually unheard of in the Midwest," Less notes. "But today, as policies come up for renewal, insureds are seeing deductibles ranging from 1% to 5% of the TIV. For large properties, this can translate into hundreds of thousands of dollars in deductibles."

How Wind and Hail Deductible Buydown Policies Work

To address this new risk, many clients are looking at Wind and Hail Deductible Buydown policies, which can effectively restore deductibles to their previous levels. These policies, often underwritten by Lloyd's of London, allow insureds to reduce their percentage deductibles back to more manageable amounts.

For example, if a property has a 1% wind and hail deductible on a $10 million building, resulting in a $100,000 deductible, a buydown policy could reduce this to $5,000.

"This policy essentially reduces the deductible to what insureds are accustomed to for other types of losses, such as fire," explains Less.

Financial Considerations and the Broker's Role

The cost of these buydown policies is generally reasonable, with premiums typically ranging from 6% to 10% of the buydown amount. For insureds facing a $100,000 deductible, this translates to a premium of $6,000 to $10,000 — a cost that many will absorb given the protection it offers if an unexpected devasting loss occurs.

For agents and brokers, offering deductible buydown options is not just a value-added service but a critical step in safeguarding their clients' financial stability.

"With a buydown option, you can provide a solution to changing coverage terms," Less emphasizes. "It's a way for insureds to cover that gap and protect themselves from expenses they haven't budgeted for."

A Broader Trend in the Insurance Market

The introduction of wind and hail deductibles is not limited to any one region or type of insurer. While these deductibles were initially more common on the US coasts, particularly in hurricane-prone areas, they're now becoming standard across the country, including in the Midwest. This shift reflects a broader trend in the insurance market, with carriers of all sizes adjusting their terms in response to escalating storm losses.

"Regional companies were slower to adopt these deductibles, but now all carriers are starting to change their terms," Less observes. "It's a response to the increased severity and frequency of storms, and it's a way for carriers to offer more competitive Property insurance rates while still managing their risk."