What Is Eigen risico?
Eigen risico is a Dutch term that directly translates to "own risk," functioning as the equivalent of a deductible or excess in an insurance policy. It represents the predetermined amount of money a policyholder must pay out-of-pocket towards a covered loss before their insurer begins to pay the remainder of the claim. The concept is fundamental to risk management in insurance, influencing both the cost of premium and the financial responsibility of the insured. By requiring the policyholder to bear a portion of the initial loss, Eigen risico aims to mitigate moral hazard, reduce the number of small claims, and encourage more cautious behavior. The specific amount of Eigen risico varies widely depending on the type of insurance, the insurer, and the policy terms chosen by the individual or entity.
History and Origin
The concept of shared risk, central to Eigen risico, has roots stretching back millennia, with early forms of insurance appearing in ancient civilizations. However, the more formalized application of a policyholder's "own risk" or deductible, particularly in health and property insurance, gained prominence with the evolution of modern insurance markets. In the United States, for instance, the integration of deductibles and co-payments into health insurance plans became a significant feature in the mid-20th century, notably alongside the rise of "major medical" insurance. These mechanisms were often introduced to address concerns about the overuse of medical services and to encourage consumers to consider the costs of their healthcare choices. Academic research has traced the history of cost-sharing in U.S. health insurance, highlighting its origins in insurers' efforts to manage "moral hazard" and its widespread adoption from the 1950s onward, initially within car insurance before expanding into health coverage.5 The practice allowed insurers to offer lower premiums by transferring a portion of the initial financial burden to the insured.
Key Takeaways
- Eigen risico is the Dutch term for a deductible or excess in an insurance policy, representing the initial amount a policyholder pays for a claim.
- It serves to reduce insurance premium costs and discourage frivolous or small claims.
- The amount of Eigen risico can be fixed or a percentage of the insured value, varying by policy type.
- Understanding Eigen risico is crucial for financial planning and managing potential liability when a loss occurs.
- A higher Eigen risico typically corresponds to a lower annual premium, shifting more initial risk to the policyholder.
Formula and Calculation
The calculation involving Eigen risico is straightforward. When a covered loss occurs, the payout from the insurer is determined by subtracting the Eigen risico from the total approved loss amount, up to the policy's maximum coverage.
The basic formula is:
For example, if a policy has an Eigen risico of €500 and the total approved loss is €2,000, the insurer would pay out €1,500. If the total approved loss is less than or equal to the Eigen risico, the insurer pays nothing, and the entire loss is borne by the policyholder.
Interpreting the Eigen risico
Interpreting the Eigen risico involves understanding its direct impact on a policyholder's financial exposure and the overall cost of their insurance policy. A lower Eigen risico means the insurer will start paying sooner for a covered loss, reducing the policyholder's immediate out-of-pocket expense. This typically comes at the cost of a higher regular premium. Conversely, a higher Eigen risico leads to lower premiums but requires the policyholder to absorb a greater initial financial impact in the event of a claim.
The choice of Eigen risico should align with an individual's personal financial situation and their capacity for risk management. For instance, someone with substantial liquid savings might opt for a higher Eigen risico to benefit from lower premiums, assuming they can comfortably cover the initial cost of a claim. Conversely, someone with limited emergency funds might prefer a lower Eigen risico despite higher premiums, to minimize unpredictable medical expenses or repair costs. It is important to consider the frequency of potential claims and the financial preparedness for unexpected events when selecting the appropriate Eigen risico level.
Hypothetical Example
Consider Sarah, who has a home insurance policy with an Eigen risico of €750. One evening, a sudden storm causes a tree branch to fall, damaging her roof. She contacts her insurer, and after an assessment, the total cost to repair the roof is determined to be €3,000.
Here's how Eigen risico applies:
- Total Approved Loss: €3,000
- Eigen risico: €750
Sarah is responsible for paying the first €750 of the repair costs. After she pays this amount, her insurance company will cover the remaining portion of the approved loss.
Calculation:
Insurer Payout = Total Approved Loss - Eigen risico
Insurer Payout = €3,000 - €750 = €2,250
So, Sarah pays €750 directly to the contractor, and her insurer pays €2,250. This demonstrates how Eigen risico operates as the initial threshold the policyholder must meet before the insurer's financial obligation begins for a claim.
Practical Applications
Eigen risico is a common feature across various types of insurance, significantly impacting financial planning and individual asset protection. In health insurance, it dictates how much an individual pays for medical services before their plan's coverage starts, often excluding preventive services. This can influence decisions about seeking non-urgent care. For auto insurance, 4Eigen risico typically applies to collision and comprehensive claims, meaning the driver pays this amount for repairs or replacement after an accident or theft.
In homeowners' insurance, the Eigen risico is the amount homeowners pay out-of-pocket for damages like fire or storm damage before the insurer provides indemnity. Some policies may even have different Eigen risico amounts for specific perils, such as a higher one for windstorms or earthquakes. The choice of Eigen risico directly affects the annual premium: a higher Eigen risico generally leads to a lower premium, and vice-versa. This allows policyholders3 to customize their insurance costs based on their financial capacity and willingness to absorb initial losses. Understanding this balance is a key component of effective risk management in personal finance. The amount you have to pay towards the total cost of an insurance claim is known as insurance excess.
Limitations and Criti2cisms
While Eigen risico is a fundamental component of most insurance policy structures, it is not without limitations or criticisms. One primary concern is the potential financial strain it can place on policyholders, especially those with limited savings or facing unexpected, high-cost events. A substantial Eigen risico can deter individuals from seeking necessary care or making smaller, but important, claims if they cannot afford the upfront cost. This is particularly relevant in health insurance, where high deductibles can lead to delayed treatment and potentially worse health outcomes, especially for lower-income individuals.
Another critique revolve1s around the behavioral impact. While intended to reduce frivolous claims and encourage responsible behavior, a very high Eigen risico might make policyholders feel as though their coverage is less valuable, leading to disengagement or a reluctance to utilize their insurance benefits even when truly needed. For insurers, accurately setting Eigen risico levels requires extensive data analysis and actuarial science to balance affordability for consumers with adequate underwriting profitability. Miscalibration can lead to either underinsurance for the public or unsustainable losses for the insurer. The objective is to balance premium affordability with adequate risk sharing, without creating undue financial barriers to essential services.
Eigen risico vs. Deductible
The terms "Eigen risico" and "deductible" refer to the same financial concept within insurance, with Eigen risico being the Dutch equivalent of the English term "deductible" or "excess." In essence, they both designate the portion of a covered loss that the policyholder is responsible for paying before the insurance company's payout begins. The confusion sometimes arises from the direct translation ("own risk"), which might suggest a broader concept than just the initial payment on a claim. However, in the context of an insurance policy, Eigen risico functions identically to a deductible: it is a fixed monetary amount or a percentage that is subtracted from the total approved claim amount. Therefore, while the terminology differs by language, the practical application and financial implication of Eigen risico are precisely that of a deductible, serving to share the initial burden of a loss between the insured and the insurer.
FAQs
What does "Eigen risico" mean in simple terms?
Eigen risico simply means "own risk" and refers to the amount of money you agree to pay yourself for a covered loss before your insurance company starts paying. It's the first portion of a claim that comes out of your pocket.
How does "Eigen risico" affect my insurance premium?
Generally, there's an inverse relationship: if you choose a higher Eigen risico, your regular premium (the amount you pay periodically for the insurance) will typically be lower. Conversely, a lower Eigen risico means a higher premium. This is because you are taking on more or less of the initial financial liability.
Is "Eigen risico" the same for all types of insurance?
While the concept is consistent, the specific Eigen risico amount varies significantly across different types of insurance policy (e.g., health, auto, home). Some policies might also have different Eigen risico amounts for different types of covered events or for individual versus family coverage.
Can I choose my "Eigen risico" amount?
In many cases, yes. Insurers often offer several Eigen risico options, allowing policyholders to select a level that fits their financial planning and comfort with assuming initial risk. However, there may be minimums set by the insurer and sometimes maximums by regulation.
What is an "out-of-pocket maximum" and how does it relate to "Eigen risico"?
An out-of-pocket maximum is the most a policyholder will pay for covered services in a given policy period (usually a year), including their Eigen risico, co-payments, and co-insurance. Once this maximum is reached, the insurer typically pays 100% of all covered costs for the remainder of that period, providing a cap on your total financial exposure.