What is the purpose of a “deductible” in an insurance policy?

The purpose of a deductible in an insurance policy is fundamentally about cost-sharing between the insurer and the insured. By requiring the insured to pay a portion of a claim before the insurer contributes, deductibles serve several essential functions.

Firstly, they encourage policyholders to take responsibility for minor losses and damages rather than filing claims for everything, which helps to reduce the overall number of claims. This not only minimizes administrative costs for the insurance company, potentially leading to lower premiums for insured individuals, but also deters fraudulent activities since the insured will only be compensated for losses that exceed the deductible amount.

Furthermore, deductibles can help level the playing field in terms of risk management. They ensure that the insured has a vested interest in managing their risks appropriately, as they will have to cover part of any loss themselves. Overall, this mechanism helps maintain the sustainability of the insurance system and balances the financial responsibilities between the insurer and insured.