Contract design
Contract design: 3 technical terms explained – definition, synonyms and legal basis.
Deductible
Synonyms: Excess, Self-insured amount
A deductible is the contractually agreed portion of a loss that the insured bears itself before the insurance payment begins.
Function and purpose
The deductible governs risk sharing between the insured and the insurer. It reduces premium, removes frequency losses from the cover and creates loss prevention incentives, because the company remains economically involved in every loss.
Common structures
Typical forms include fixed per-occurrence deductibles, percentage deductibles (for example for natural catastrophe perils), annual aggregate deductibles with a cap, and waiting periods as a time deductible in business interruption insurance. The choice depends on risk-bearing capacity, loss experience and premium effect.
Practical note
In international insurance programmes, deductible structures should be consistent across all local policies; uncoordinated local deductibles can create unintended coverage gaps or double retentions.
Sum Insured
Synonyms: Coverage amount
The sum insured is the contractually agreed maximum amount up to which the insurer pays in the event of a loss, and also the basis for premium calculation.
Setting the amount
In property insurance the sum insured should correspond to the reinstatement or replacement value (new-value insurance). It is based on current valuations, indexation and complete declaration of locations.
Underinsurance
If the sum insured is below the actual value, the insurer may reduce the indemnity proportionally (average clause). Remedies include value-margin clauses, valuation-date agreements or a waiver of the underinsurance defence.
Relationship to limits
Besides the sum insured, first-loss sums and sublimits (for example for natural perils or debris removal) cap individual coverage components. A consistent limit concept is a core task of programme design.
Premium Payment Frequency
Synonyms: Payment mode
Premium payment frequency is the contractually agreed rhythm at which recurring insurance premiums are due – typically annual, semi-annual, quarterly or monthly.
Concept
Premium payment frequency sets the rhythm at which the policyholder pays the premium. It primarily concerns premium payment, but can also matter for recurring benefits paid by the insurer, such as annuity payments.
Variants and surcharges
A common distinction is made between annual, semi-annual, quarterly and monthly payment frequency. For more frequent payment modes, insurers often charge an instalment surcharge to compensate for the interest they would otherwise earn on a premium calculated and collected annually in advance.
Practical relevance
For corporate clients with multiple policies, a consistent payment frequency aligned with cash flow can ease liquidity planning. In international programmes, consistent payment frequency across participating local entities also helps reduce reconciliation effort.