Franchise (Relative Deductible)

A Franchise (Relative Deductible) refers to a specified excess amount or percentage agreed upon in an insurance policy. When the loss to the insured subject matter does not reach this statutory or agreed threshold, the insurer bears no liability for compensation; however, once the loss exceeds this threshold, the insurer must pay out the entire loss in full, without deducting the excess itself. While the franchise is no longer common in the standard commercial clauses of modern motor insurance, it remains a notable risk-sharing mechanism with a unique underwriting logic in the history of general insurance and specific niche policies.

How Franchise Operates and Its Payout Logic

The calculation methodology of a franchise differs fundamentally from an absolute excess (standard deductible), primarily in how claims are settled once losses cross the threshold:

When the loss is below the franchise threshold:

If the loss from a road accident or property damage is lower than the agreed franchise amount (for instance, a franchise set at RM1,000 against an actual loss of RM800), the entire loss is borne solely by the policyholder, with no payout from the insurer.

Full payout when exceeding the franchise threshold: 

If the actual loss exceeds the franchise (for instance, an actual loss of RM3,000 against a franchise of RM1,000), the insurer will not deduct the RM1,000. Instead, it will settle the full RM3,000 loss based on the agreed sum insured or percentage under the policy terms.

Key Differences: Franchise vs. Standard Excess

In insurance contract structuring, a franchise and an absolute excess reflect two fundamentally different approaches to risk retention and claim settlements:

Fundamental difference in deduction methods:

A franchise operates on an "all-or-nothing" basis—pay nothing below the threshold, but pay in full once exceeded, rendering the deductible void once breached.

An absolute excess (standard deductible), by contrast, is always deducted from the total claim regardless of the loss size (meaning the policyholder always absorbs a portion out-of-pocket). 

Impact on financial claim outcomes:

When a loss marginally exceeds the threshold, the payout under a franchise is noticeably higher than that under a standard excess. Consequently, under identical coverage terms, an insurance policy structured with a franchise carries higher actuarial risk, leading to generally higher commercial premium rates compared to policies with standard excess clauses.

Application of Franchise in Modern Motor Insurance

With the standardisation of global motor insurance policy wordings and advancements in actuarial science, the use of franchises has shifted significantly: 

Rarity in mainstream commercial motor policies: 

In today's mainstream motor insurance (such as comprehensive commercial motor policies and standard add-on covers), insurers have largely shifted to absolute excess amounts or fixed-percentage deductibles to rein in operating costs on minor claims and streamline settlement standards. As a result, franchises are rarely seen in standard private or commercial motor policies. 

Retention in special-type vehicles or bespoke endorsements: 

Today, franchises are primarily utilised in bespoke endorsements for large-scale commercial fleet policies, specific sub-agreements for multinational fleet comprehensive covers, or specialized international reinsurance treaties. In these sectors, both parties negotiate a franchise to strike a balance between efficient compensation for major losses and managing the administrative overhead of high-frequency, low-value claims.