What is the primary reason for implementing a deductible in an insurance policy?

The primary reason for implementing a deductible in an insurance policy is to discourage lesser claims. A deductible is the amount that the insured must pay out of pocket before the insurance coverage kicks in. By setting a deductible, insurers encourage policyholders to avoid filing claims for minor damages or losses. This practice helps reduce the number of small claims that the insurer has to process, which in turn helps keep insurance premiums lower and maintains the viability of the insurance pool.

When policyholders understand that they will bear some of the financial responsibility for claims below a certain threshold, they are less likely to submit claims for small incidents. This behavior benefits both the insurer and the insured; the insurer faces fewer administrative costs and a more stable claims experience, while the insured may enjoy lower premiums as a result of reduced claims frequency. Thus, the deductible plays a critical role in the functioning of insurance policies by not only managing risk but also shaping the behavior of policyholders regarding claim submissions.