What is the primary aim of a deductible in an insurance policy?

The primary aim of a deductible in an insurance policy is to reduce the insurer's exposure to minor claims. A deductible is the amount the policyholder must pay out of pocket before the insurer starts to cover the costs of a claim. By requiring the insured to bear some financial responsibility for smaller claims, deductibles help limit the number of minor claims that can be filed. This allows the insurer to focus on more significant claims that have a greater impact on their overall risk and loss experience.

When policyholders must absorb smaller losses due to the deductible, it discourages frequent small claims and helps maintain overall lower premiums for everyone involved, as administrative costs related to processing numerous minor claims can be high. Deductibles also encourage insured individuals to manage their risks more effectively. Therefore, this mechanism is essential for ensuring the sustainability of the insurance model, balancing the interests of both the insurer and the insured.