Conditional and unconditional deductible (franchise): how much is the insurance payout reduced?
A loss of 2.9 million brings a payout of zero, a loss of 3.1 million brings the full 3.1 million: that is how the «jump» of a conditional deductible works. An unconditional deductible, by contrast, takes the same amount off every loss that exceeds it. Calculations and journal entries for five different losses, a percentage deductible and three incidents in one year.
The «Nurafshon texnika» household appliance shop has insured the goods in its warehouse for 200 million soum. The policy says "deductible 3 000 000 soum". The main question for the shop owner, Sardor: if the warehouse floods or burns, how much will the insurer actually pay? The answer depends on the type of deductible.
Key rules
- A deductible (franchise) is the part of a loss that the insurer does not cover and that the policyholder bears itself. Its type and size are written into the contract
- An unconditional deductible is subtracted from any loss: payout = loss − deductible (if the result is negative, zero)
- A conditional deductible acts as a "door": if the loss does not exceed the deductible, there is no payout; if it does, the loss is covered in full. What happens when the loss is exactly equal to the deductible is decided by the wording of the contract (the table below assumes: if equal, no payout)
- A deductible may be set as a fixed amount or as a percentage. It makes a big difference whether the percentage is taken from the sum insured or from the amount of the loss, so be sure to check this in the policy
- A deductible may be set separately for each incident or as one overall amount for the contract period. If it is per incident, three incidents in a year mean it is subtracted three times: check which one is written in the policy
- A conditional deductible screens out small claims, but for a loss slightly above the threshold it produces a "jump": a 2.9 million loss gets 0, a 3.1 million loss gets 3.1 million
- In the journal entries below the deductible is not recorded as a separate entry: it remains in the financial result by itself as the difference between the amount of the loss and the amount of the payout
Example: five different losses, one deductible
Deductible 3 000 000 soum. Amounts are hypothetical and compiled by the author.
| Loss | Conditional: payout | Conditional: borne by us | Unconditional: payout | Unconditional: borne by us |
|---|---|---|---|---|
| 1 800 000 | 0 | 1 800 000 | 0 | 1 800 000 |
| 3 000 000 | 0 | 3 000 000 | 0 | 3 000 000 |
| 3 200 000 | 3 200 000 | 0 | 200 000 | 3 000 000 |
| 8 000 000 | 8 000 000 | 0 | 5 000 000 | 3 000 000 |
| 25 000 000 | 25 000 000 | 0 | 22 000 000 | 3 000 000 |
The rule is plain to see: with an unconditional deductible the shop always loses 3 million on large losses, while with a conditional one a loss above the deductible comes back in full. So for the same size, an unconditional deductible is less favourable for the policyholder. When comparing the two options, ask about the difference in premium too: it is logical to expect a lower premium for the less favourable condition, but check this against the insurer's actual offer.
Percentage deductible: 1% of the sum insured or 5% of the loss
| Loss | 1% × 200 million = 2 million deducted | Payout | 5% of the loss deducted | Payout |
|---|---|---|---|---|
| 8 000 000 | 2 000 000 | 6 000 000 | 400 000 | 7 600 000 |
| 25 000 000 | 2 000 000 | 23 000 000 | 1 250 000 | 23 750 000 |
Both contracts are called a "percentage deductible", yet on an 8 million loss the difference in payout is 1.6 million soum.
Three incidents in one year
Losses: 4 000 000, 2 500 000 and 6 000 000 soum, 12 500 000 in total. The deductible is 3 000 000, separately for each incident: - conditional: 4 000 000 + 0 + 6 000 000 = 10 000 000 payout; - unconditional: 1 000 000 + 0 + 3 000 000 = 4 000 000 payout.
Journal entries: an 8 million loss, unconditional deductible
Goods in the warehouse were damaged by water, there is no culpable person, and the insurer accepted a payout of 5 000 000 soum.
| Transaction | Debit | Credit | Amount | NAS No. 21 |
|---|---|---|---|---|
| Damaged goods transferred to losses | 5910 | 2910 | 8 000 000 | Paragraph 249, line 1 |
| Loss charged to expenses as there is no culpable person | 9430 | 5910 | 8 000 000 | Paragraph 249, line 4; paragraph 412, line 14 |
| Insurance payout from the insurance organisation under property insurance | 4510 | 9390 | 5 000 000 | Paragraph 405, line 12 |
Result: expense 8 million, income 5 million, net loss 3 million, which is exactly the deductible. The table in NAS No. 21 has no separate pattern for the payout money arriving at the bank: set out how it is recorded in your accounting policy.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
A bakery's insurance contract for its tandoor oven sets an unconditional deductible of 1 500 000 soums. In an insured event the loss was 9 000 000 soums. How much does the insurer pay?
The contract sets a conditional deductible of 3 000 000 soums. The loss was 5 000 000 soums. How much does the insurer pay?
Bakery equipment with an actual value of 50 000 000 soum is insured for 40 000 000 soum. The contract has a proportional liability system and an unconditional deductible of 500 000 soum; the deductible is subtracted from the proportionally calculated amount. The loss is 10 000 000 soum. How much does the insurer pay?
A truck with an actual value of 40 000 000 soum is insured at its full value (40 000 000 soum). After an accident the truck cannot be restored, and its usable salvage was valued at 5 000 000 soum. Under the contract, loss = actual value − value of usable salvage; there is no deductible. What is the insurance indemnity?
The insurance contract sets a coverage limit of 30 mln soum per event and an unconditional deductible of 2 mln soum (the deductible is subtracted from the loss, then the limit is applied; hypothetical terms). The loss from the event was 45 mln soum. How much does the insurer pay?
Answered: 0 / 50 of 5 correct
All tests →See also
Sources
- Fundamentals of insurance (general concepts) · conditional and unconditional deductible (franchise), setting the deductible as an amount or a percentage; the exact type, size and application are set in each insurance contract
- NAS No. 21 "Chart of Accounts for Accounting of Business Entities and Instructions for Its Application": paragraph 249 (lines 1 and 4); paragraph 412 (line 14) · 5910 / 1010–2990 (shortages from loss of and damage to inventory); 9430 / 5910 (shortages written off to losses; shortages and losses for which no culpable person can be identified)
- NAS No. 21 "Chart of Accounts for Accounting of Business Entities and Instructions for Its Application": paragraph 405 (line 12) · insurance payouts received from insurance organisations under property insurance 4510 / 9390
- Example, company name, amounts and calculations · compiled by the author, hypothetical