Why do insurance policies include deductibles?

Insurance policies include deductibles primarily to manage small losses more effectively and to enhance operational efficiency within the insurance framework. When a deductible is applied, the policyholder is responsible for a portion of the claim amount before the insurance coverage kicks in. This mechanism serves a couple of significant purposes.

Firstly, by establishing a threshold for smaller claims that would go directly to the policyholder, insurance companies can minimize their handling of numerous minor claims. This reduces administrative costs associated with processing many small claim submissions, allowing resources to be better allocated towards managing larger claims that exceed the deductible limit.

Secondly, deductibles encourage policyholders to be more cautious and discerning when filing claims, as they are aware they will need to cover the initial amount. This concept of risk-sharing motivates policyholders to avoid making claims for minor issues that can be easily managed by themselves, ultimately fostering responsible ownership and preventing a flood of claims that could burden the insurer.

Thus, the inclusion of deductibles in insurance policies addresses both coverage for manageable losses and the overall efficiency in claims processing, reflecting sound insurance principles and risk management strategies.