Deductible
The part of a loss the insured bears before the insurer pays. It is a pricing tool and a check on moral hazard.
A deductible is the part of a loss the insured bears before cover kicks in. It does several economic jobs. First, it lowers the premium: the insurer no longer pays small losses, which often cost more to handle than to pay. It also limits moral hazard, since the insured always bears a share of the damage and keeps a financial stake in preventing and limiting it. And it screens out the mass of small claims, so cover focuses on the events that really call for a transfer of risk. The main distinction is between a straight deductible, always subtracted from the indemnity, and a franchise deductible, which disappears once the loss exceeds a set threshold. A deductible can also apply per loss or as an annual aggregate. Its amount is the insured's first trade-off between premium and retention. A high deductible lowers the premium but means retaining more; a low one gives fuller protection at a higher price. In cyber, substantial deductibles, sometimes paired with a waiting period, have become standard, to give insureds skin in the game and keep frequency losses down.
Textbook case: a cyber policy carries a deductible of fifty thousand euros per loss. On an attack that costs two hundred thousand euros, the company bears the first fifty thousand and the insurer pays the remaining one hundred fifty thousand.
deductible, excess, retention
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