Frankness (insurance)

Various types of franknesses

Individual frankness

There are two alternatives. In the first case (frankness reached), the insurer completely compensates the disasters which exceed the amount of the frankness. This formula supports the fraud, since the policy-holder will tend to raise the cost of the small losses in order to see them completely dealt with. In the second case (deduced frankness), more frequent, the frankness is deduced from the amount entitled to compensation.

Frankness proportional

The policy-holder preserves at his load a share proportional of the disaster. This frankness is used little in the insurances for the private individuals, but more in the insurances of professionals.

Annual frankness

The policy-holder is compensated only when the entire amount of its disasters over one year reaches a certain amount. The annual franknesses can be reached or deduced .

Limits of withdrawal

The insurer limits his total compensation over the year to a maximum amount given in the police force. This clause makes it possible the insurer to be guarded against a disaster of an exceptional amount. It can be imposed by the reinsurer on the insurance company to limit its risk.

Combination of the franknesses

Of course, the same insurance policy can comprise various kinds of frankness, for example by envisaging a compensation as of the first euro for the disasters of more than 250 €, as from 1000 € of disasters in the year, within the limit of 80% of the amount of the disaster and 3 M€ per annum . This case corresponds in the order to:

an individual frankness reached from 250 €
an annual frankness reached from 1000 €
a frankness proportional from 20%
a limit of withdrawal of 3 million euros.

The frankness applied is the combination of the various franknesses envisaged with the contract.

Goal of the franknesses

The franknesses have various roles. According to the cases, they allow the insurer:

to remove the small losses which are more expensive in overheads than of compensation.
to decrease the moral Risk, the policy-holder continuing to undergo a loss in the event of disasters.
to decrease its risk of ruin, while protecting itself from an exceptional disaster.
at the time of the subscription of a contract, to oblige the policy-holder to reveal information on its risk. The choice of a policy-holder between a contract without frankness or with frankness depends indeed on its estimate from its probability of undergoing a disaster. This role is criticized because the choice of the frankness by the policy-holder also depends on his financial position and its aversion to the risks.

For the policy-holder, the franknesses allow a reduction in the premium, n the other hand in a reduction in the guarantees. The insurance policies include/understand most of the time the obligation for the policy-holder to declare all his disasters, including those for which the insurer will not intervene because of the frankness. This obligation is not respected.

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