An aggregate is the maximum amount an insurer is willing to pay for all losses sustained during a specific period, usually the duration of the policy. Note that an aggregate usually focuses on related claims or similar claims. This limit is common with policies that offer liability coverage. Should you exhaust your aggregate before the end of your policy, you’d have to cover your costs out-of-pocket.
To get into better detail, we tried to demystify the concept of aggregates in bullet points:
1. Aggregates are common with liability policies
2. Aggregate limits are not the same as claim limits. However, some definitions of aggregate mention how the claims involved should be similar or related.
3. Unless explicitly stated in your insurance document, all valid claims count towards your aggregate.
4. Aggregate payments are not limited to direct payments made to the customer, but it also covers defense costs and any other payment the insurer issues on behalf of the client.
5. Whenever a policy is renewed, the aggregate balance renews as well
To be sure you understand, let’s paint a picture of how aggregates work. For instance, Jane purchases theft insurance. The aggregate on her policy is $5000.
Three months into the start of her policy, Jane has four claims lined up for her insurer. Someone had stolen something from Jane on four different occasions; hence she filed a separate claim for each occurrence.
The average payout she is expecting from each payout is about $300, and this will bring her up to $1200 in total. However, Jane’s policy has an aggregate provision, and her insurer has ruled that the four claims filed by Jane are so similar they will be treated as one claim.
In the end, Jane is paid only $300 out of the initial $1200. As the definition above explained, the insurer has reduced their exposure to similar claims from a single client. They have also stayed within the limit of her policy aggregate of $5000.
Why Is An Aggregate Limit Important?
Some of you may be wondering what the usefulness of an aggregate is? Isn’t the insurer meant to repay you in all cases?
The first reason why an aggregate limit is important is that it protects the insurance company from unexpectedly large payouts. Monitoring how much payouts they make per claim enables them to keep their premiums at an affordable rate.
Imagine an insurance company (ABC Ltd) that has about $1,000,000 in its reserve for payouts per customer. ABC Ltd does not operate with aggregate limits on customer claims, meaning it is possible for a client to max out their limit on one claim.
One of ABC Ltd.’s clients filed a claim which exhausted the $1,000,000 in their reserve merely four months into the life of their policy.
Because of this, for the rest of the year, the client is expected to cover their costs out of pocket. Not only that, the company was forced to double the amount the client paid in subscriptions. Had there been an aggregate policy in place, none of this would have occurred.
So, we can see that this benefits clients as well as the insurer. There’s another benefit of aggregate limits for insurance clients.
Your insurer can customize a policy that reflects your risk level and appropriate budget with an aggregate.
For instance, Steve, a 35-year-old with seven-plus years of driving experience, just purchased his first car. As per state requirements, he wants to purchase insurance for his vehicle. Based on Steve’s profile and driving history, it is not likely that he will file for a claim frequently or at all.
Steve doesn’t have a lot of money to spare after purchasing his first ride, so chances are he’s looking for a policy with an affordable price tag. So a policy with a low aggregate might be the right fit for Steve.
Similarly, clients with higher risk exposures and wider budgets should go for policies with high aggregates to provide greater safety.
Frequently Asked Questions
What Does Aggregate Benefit Mean?
The total combined benefits of a policyholder and his beneficiaries is termed as an aggregate benefit.
What Is The Difference Between Per Occurrence And Per Aggregate?
Both terms define maximum payouts but in different circumstances. Per occurrence limits how much your insurer will pay you for a claim.
For example, if the per occurrence limit on your policy is $3000 and you make a claim that requires $4000 to cover damages, your insurer will only pay you $3000. Therefore, you will have to pay for the remaining $1000 out of pocket.
Whereas the per aggregate limit is the maximum amount, your insurer will pay over the lifespan of your policy.
If your policy aggregate is $100,000, this means your insurer won’t pay you more than this amount for the time your policy is still active.
What Does It Mean To Aggregate Claims?
Aggregation is a mechanism used by insurance companies to minimize the number of times they are exposed to related claims from a client.
Imagine that you purchased a policy with a per claim limit of $1000, and over the course of the year, you have five claims lined up. Each claim is similar to the next, and the average payout you will likely get for one is $400.
In a normal situation, you are expecting a $2000 payout from the insurer, but if your policy has an aggregation provision, they will treat all five claims as a single claim, and you would be paid $400.
Conclusion
Aggregates aren’t put in place by insurance companies to frustrate you; neither are they in existence to stop you from enjoying your payouts.
On the contrary, aggregate limits are established with the interest of both the insurer and insured in mind. Without them, it would be difficult for both parties to enjoy a seamless transaction together.
Sources
Aggregation – A Definition by Brown Jacobson