What role do deductibles play in insurance premiums?

Deductibles are an essential component of insurance policies, influencing not only the cost-sharing between the insurer and the insured but also the premiums that policyholders pay. When a policyholder selects a higher deductible, they are agreeing to cover a larger portion of any loss before the insurer begins to pay. This shift in risk leads insurance companies to often reduce the premium; since the policyholder has taken on more financial responsibility, the insurer's risk is lowered.

In contrast, if a policyholder opts for a lower deductible, that means they will require the insurance company to cover more of the costs in the event of a claim. As a result, the insurance company perceives this as a higher risk, which typically translates to higher premiums. Therefore, the relationship between deductible amounts and premiums is inversely correlated: higher deductibles generally correlate with reduced premiums because the policyholder is taking on more risk, which provides reassurance to the insurer.