What is the purpose of an insurance policy deductible?

The purpose of an insurance policy deductible is primarily to share the risk between the insurer and the insured. When a policyholder agrees to a deductible, they are taking on a portion of the financial responsibility for any claims made under the policy. This means that in the event of a loss, the insured pays the initial amount specified by the deductible before the insurance coverage kicks in. By having a deductible, the insurer can reduce the number of small claims they may need to pay out, as the deductible is intended to be an out-of-pocket expense that the insured must cover first. This risk-sharing mechanism can encourage responsible behavior by the insured, as they are directly affected by the costs of minor claims. In turn, this can lead to overall lower premiums for the insured, as insurers can better manage their risk and claims costs.