Deductibles are an important component of insurance policies and influence both the premium amount and the claims coverage. A higher deductible generally leads to lower insurance premiums, as the policyholder assumes a larger share of the risk. But what role do deductibles really play and why do they make sense?
I. The basic idea of the insurance principle
In order to understand the significance of deductibles, it is first important to shed light on the basic principle of insurance. This principle is based on a millennia-old success story and dates back to the Phoenicians in the 1st millennium BC. At that time, seafarers insured each other in order to minimize the risk of ship loss and damage to merchandise. This ancient concept laid the foundation for the modern insurance industry.
According to this principle, people who are exposed to similar risks join together to form a risk pool. Everyone pays contributions into a joint insurance fund, and in the event of a claim, the policyholders receive appropriate compensation. The amount of the premium depends on the probability of the risk. Solidarity within the community is of crucial importance here. It enables individuals to avoid financial losses that they could not bear alone. The insurance principle is based on the law of large numbers, which states that the risk for the individual insurer decreases as the number of insurance policies increases. By pooling risks in a larger collective, it is therefore possible to spread the financial consequences of rare and serious events across many shoulders.
II. The role of deductibles in the risk community
To ensure that the risk community remains stable and financially healthy, a balanced distribution of claims is essential. If too many claims are reported, this can put a strain on the community and jeopardize its financial stability. This is where deductibles come into play. They not only serve individual responsibility, but also the protection of the entire community. Deductibles encourage policyholders to take preventive measures to avoid claims. They help to ensure that premiums do not rise excessively despite appropriate sums insured, as the entry threshold for the insurer is raised. Despite the unpredictability of damage, the insurance continues to offer support through claims payments. Deductibles are therefore a protective mechanism for the benefit of the community.
The use of deductibles can reduce the phenomenon of moral hazard. This term refers to the tendency for people with insurance to act more riskily because they feel protected by the insurance. Deductibles ensure that the policyholder retains a financial interest in avoiding claims. This promotes balanced behavior and minimizes the risk of unnecessary or frivolous claims. Furthermore, deductibles help to stabilize premium costs for all members of the insurance community. Without deductibles, frequent small claims could drive up the costs for the insurance community. By raising the entry threshold for the insurer, the premiums remain within a reasonable range despite appropriate sums insured. This principle is particularly important in areas of insurance where the frequency or severity of claims is difficult to predict.
III Example: Maintenance of historic buildings
A striking example of the application of the principle of deductibles can be found in the insurance of historic buildings, such as castles or listed buildings. These buildings pose particular risks, and maintenance and restoration can be especially costly. Insurance policies for such buildings often have high premiums, as the risk of damage due to natural influences or human error is relatively high. At the same time, the maintenance obligation plays an important role. Policyholders are responsible for keeping their valuable cultural assets in good condition in order to prevent frequent and major damage. Buildings are often susceptible to damage due to ageing, weathering and wear and tear. It is therefore of the utmost importance for owners of such buildings to carry out regular maintenance and inspections in order to identify and eliminate potential risks at an early stage. This can include checking the building fabric, foundations, roofs and electrical systems. The agreement of a deductible in the insurance policy motivates the owners to deal even more intensively with the preservation and maintenance of these valuable buildings, to take preventive measures to avoid potential damage and thus to preserve the historical integrity of these buildings.
Conclusio
Insurance deductibles play a decisive role in the stability and efficiency of insurance communities. They promote the individual responsibility of policyholders, motivate them to prevent losses and reduce the risk of moral hazard. By raising the entry threshold for the insurer, deductibles help to keep premiums within reasonable limits despite appropriate sums insured. This is particularly important in insurance areas with claims frequencies that are difficult to predict. At Kotax, we are happy to answer all your questions about deductibles and explain their role in your insurance contract. Your security and financial stability are our top priority.
