Alberta General Insurance Level 1 Practice Exam

A deductible in an insurance policy serves the purpose of establishing a threshold that the policyholder must pay out of pocket before the insurer will begin to cover any expenses related to a claim. This mechanism is important for a couple of reasons.

First, it encourages policyholders to share in the cost of losses, which can help reduce the frequency of small or frivolous claims. By requiring the insured to pay a certain amount before benefits are paid, it discourages people from filing claims for minor damages that they can afford to cover themselves.

Second, deductibles contribute to the control of overall insurance costs. They allow insurers to lower the overall premiums, as higher deductibles typically lead to lower premium rates. It allows the insurance provider to safeguard against minor claims, thus focusing on larger, more significant claims that could have a substantial impact on their financial liability.

In summary, the purpose of a deductible is to define an initial amount that must be paid by the insured before the insurer contributes to the loss, thereby encouraging responsible use of the insurance policy while maintaining the insurer's operational viability.