How does a deductible benefit an insurance company?

A deductible functions effectively as a cost-sharing mechanism between the insurer and the insured. By requiring policyholders to cover a certain amount of their losses or expenses before the insurance policy kicks in, the insurer limits the financial exposure it faces for claims.

When a deductible is in place, the insurance company only needs to pay for covered losses that exceed the deductible amount, thereby reducing the overall payout for claims. This reduction in payout can help maintain lower premiums for all insured individuals, as the risk and financial responsibility are shared. Consequently, deductibles incentivize policyholders to bear minor losses themselves while still ensuring protection against more significant risks.

Additionally, the inclusion of a deductible can have broader financial implications for the insurance company and its policyholders, as it prevents the insurer from being bogged down with numerous small claims that might be more manageable for the insured to handle without involving the coverage.