Question 2

Reduction in the cost of insurance

A deductible lowers the cost of insurance by requiring policyholders to pay a specified amount out of pocket before the insurance coverage kicks in, which can lead to lower premiums.

A) Increase in the amount of small claims

This option is incorrect because a deductible typically discourages small claims. When policyholders are responsible for a portion of the loss, they are less likely to file claims for minor incidents, as they would need to pay the deductible amount first.

B) Reduction in the cost of insurance

This option is correct as deductibles generally lead to lower insurance premiums. Insurers reduce the premium costs because the policyholder assumes some financial risk by paying the deductible before the insurer covers the remaining costs.

C) Avoidance of an uncovered loss

This option is incorrect because a deductible does not prevent losses from being uncovered; it merely defines the threshold at which the insurance coverage begins. Losses that fall below the deductible amount will still be the responsibility of the policyholder.

D) Increase of moral hazards

This option is incorrect as well. A deductible can actually reduce moral hazard by making policyholders more cautious about filing claims, since they have a financial stake in the loss.

Conclusion

The correct answer is B, as deductibles are designed to lower insurance premiums by shifting some of the financial responsibility to policyholders. Options A, C, and D fail to capture the primary function of a deductible, which is to provide cost savings on insurance while encouraging responsible claim behavior.