Why do insurers use deductibles?

Insurers use deductibles primarily to reduce the number of small claims being filed. A deductible is the amount that a policyholder is required to pay out-of-pocket before the insurance company pays for a claim. By having this cost-sharing feature, insurers discourage policyholders from submitting claims for minor issues or damages that they can afford to cover themselves. This approach helps keep administrative costs down and allows insurance companies to focus on more substantial claims that align with their coverage intent.

When deductibles are in place, policyholders are more likely to weigh the financial impact of filing a claim against the out-of-pocket expense they would incur. For smaller incidents, individuals may choose to handle the costs themselves rather than go through the claims process, thus reducing the volume of claims processed by insurers. This ultimately contributes to maintaining lower premiums across the board, as it prevents an increase in the frequency of minor claims, which can lead to higher overall costs for the insurance provider.