Deductible: What is it and How Does it Work?
Deductible is a term frequently encountered in various financial fields, including insurance policies and healthcare services. In this article, we will delve into the concept of deductible, its types, and its effects on insurance claims, premium costs, and moral hazards, backed by academic research.
What is Deductible?
Deductible refers to a specific amount that the insured must pay for services claimed under an insurance policy. This amount must be paid before the insurance company provides coverage. Deductible is a mechanism used to share risk between the insured and the insurer.
Types of Deductible
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Health Insurance: In health insurance, the deductible is usually determined annually and represents the total amount the insured must pay within a year.
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Co-insurance: Co-insurance requires the insured to pay a certain percentage of healthcare expenses. For example, a 20% co-insurance policy would require the insured to pay 20% of each healthcare expense.
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Auto Insurance: In auto insurance, the deductible is paid in the event of an accident or damage. This amount is usually paid for each claim.
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Property Insurance: In property insurance, the deductible is a fixed amount paid by the insured for each claim, regardless of the total damage.
Academic Research Findings
Various studies have investigated the effects of deductible on insurance claims, premium costs, and moral hazards.
Economic Effects
Research has shown that high deductibles lead to a decrease in insurance claims, as insured individuals tend to avoid making small claims (Loisel and Deniz, 2015). Additionally, high deductibles can result in lower premium costs, as insurers face lower risks (Cohen and Siegelman, 2010).
Moral Hazards and Risk Perception
Moral hazard refers to the insured´s tendency to take risks without considering the consequences. The presence of a deductible helps to mitigate this behavior, as insured individuals are more likely to avoid risky behavior (Kunreuther and Pauly, 2005).
Deductible is a critical component of insurance policies, regulating the risk-sharing between the insured and the insurer. Academic research has demonstrated the significant impact of deductible on insurance claims, premium costs, and moral hazards. When selecting insurance policies, it is essential to carefully evaluate the deductible amount, as it can have significant advantages for both the insured and the insurer.