Difficulty: Medium

Average Score: 50%

An effect of a deductible is the:

Rationale

Reduction in the cost of insurance.

A deductible is an amount that the insured must pay out of pocket before the insurance coverage kicks in. By requiring the policyholder to bear some of the costs, insurance companies can lower premiums, making insurance more affordable.

A (increase in the amount of small claims) YOUR ANSWER

A deductible typically discourages policyholders from filing small claims, as they must pay the deductible amount first. This leads to fewer small claims being filed, rather than an increase.

B (reduction in the cost of insurance) CORRECT

By incorporating a deductible into an insurance policy, the insurer can lower the premiums charged to the policyholder. This is because the deductible limits the insurer's liability for minor losses, reducing their overall risk and costs associated with processing small claims.

C (avoidance of an uncovered loss) YOUR ANSWER

A deductible does not directly prevent uncovered losses; it merely shifts some of the financial burden to the insured. If a loss occurs that is not covered by the policy, the deductible does not provide any protection against that loss.

D (increase of moral hazards) YOUR ANSWER

Moral hazard refers to the increased risk that the insured may engage in riskier behavior because they are protected by insurance. A deductible actually reduces moral hazard by incentivizing policyholders to avoid small claims and manage risks more prudently, as they bear some costs.

Conclusion

Deductibles play a significant role in the cost structure of insurance policies. By requiring the insured to pay a portion of claims, deductibles effectively reduce the premiums charged, making insurance more accessible. The other options highlight misconceptions about the role of deductibles, emphasizing that they primarily serve to balance risk and cost, rather than increase claims or moral hazards.

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