DEFINITION of 'Back-To-Back Deductible'

An insurance policy deductible that is the same as the coverage limits. Back-to-back deductibles are a feature of fronting policies, and require the insured party to pay for all claims made. Because the deductible is the same as the limit, the insurer is generally without liability.

BREAKING DOWN 'Back-To-Back Deductible'

Policyholders, such as large corporations, balance the amount of deductible they are willing to accept with the amount of premium they will have to pay for coverage. High deductibles typically lower the cost of the policy because the insurer is liable for a reduced amount. A back-to-back deductible goes even further by removing any expectation that the insurer will have to pay for any claim. If a claim is made against a policy with a back-to-back deductible, the policyholder will either pay for the entire claim itself or will reimburse the insurer if the insurer handles the initial claims payment.

Back-to-back deductibles are features of fronting policies. These are policies issued or purchased in order to allow a business to meet regulatory requirements, such as a requirement that the business be covered by an insurance policy. The insurer will issue a policy, but the policyholder holds on to all of the risk. The policy does not indemnify the insured against any risk because the insured is responsible for all claims. Another option for creating a fronting policy is to have the insurer underwrite a policy and then cede the risk to a reinsurance company that is controlled by the company that purchased the insurance policy in the first place. In this situation there only is risk if the reinsurer becomes insolvent.

Back-to-back deductibles and fronting policies are closely related to self-insurance. In the case of self-insurance, a business agrees to cover all claims made against it. Because of the potential costs of claims, this type of strategy is typically reserved for large corporations that have the financial ability to absorb losses.

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