Michigan Property & Casualty Practice Exam

Deductibles are commonly included in insurance policies primarily to lower premiums by sharing the risk between the insurer and the insured. When an insured agrees to pay a certain amount out-of-pocket for a claim before the insurance coverage kicks in, it helps to reduce the insurer's overall risk and, in turn, can lower the cost of the premium. By having a deductible, the insured is incentivized to manage minor losses themselves, thus reducing the number of small claims that insurance companies must process. This risk-sharing mechanism allows insurers to keep premiums more affordable for everyone while still providing coverage for larger losses, making it a fundamental aspect of how insurance works.

This approach also plays a role in promoting responsible behavior among policyholders, as they are more likely to think twice before filing a claim for minor damages that fall below the deductible amount. The overall design of including deductibles aligns with creating a balanced risk environment for both the insurer and the insured.