How do deductibles affect premium costs and claim frequency?

• A. Higher deductibles lower premiums and reduce claim frequency.
• B. Higher deductibles raise premiums and increase claim frequency.
• C. Higher deductibles have no effect on premiums.
• D. Higher deductibles raise premiums but do not affect claim frequency.

Answer: (A)

Deductibles are a share of the loss you agree to pay before the insurer pays. When you raise the deductible, you take on more of the loss yourself, so the insurer covers less risk. To reflect this lower risk, the premium is reduced, so you pay less for the policy. At the same time, a higher deductible makes you think twice before filing smaller claims, since you’d have to cover more of the cost out of pocket. This tends to lower how often claims are filed.

So higher deductibles lead to lower premiums and fewer claims, which is why this option is correct. The other statements misstate the relationship: higher deductibles do not raise premiums, nor do they leave premiums unchanged, and they can influence claim frequency.