What is a deductible?

A deductible is defined as the amount that the insured must pay out of pocket before the insurer will begin to pay a claim. This concept is crucial in insurance because it helps to mitigate moral hazard by ensuring that the policyholder has a financial stake in the loss. By requiring the insured to pay a certain amount toward a claim, the insurer also encourages responsible risk management among policyholders, as they are more likely to avoid situations that lead to claims.

In practice, deductibles can vary widely depending on the type of insurance, the specific policy terms, and the preferences of both the insurer and the insured. They can be a flat dollar amount or a percentage of the total claim, but their primary function remains the same: to reduce the insurer's cost and encourage the insured to think carefully about the risks they insure against.