How does a deductible affect insurance premiums?

How deductibles change the price of insurance

How deductibles lower premiums
A deductible shifts part of the first-dollar risk from the insurer to the insured. When a policyholder accepts a higher deductible, the insurer expects to pay fewer small claims and to face lower administrative costs per dollar paid. The Insurance Information Institute explains that this transfer of initial loss exposure usually translates into lower premiums because insurers price policies to reflect expected claim outlays and transaction costs. Empirical research in health economics supports the mechanism: work by Amy Finkelstein Massachusetts Institute of Technology and analyses of the RAND Health Insurance Experiment summarized by Joseph P. Newhouse Harvard University show that greater cost-sharing reduces utilization of services, which in turn reduces insurer payouts. The same principle applies in property, auto, and other lines where small, frequent claims make up a predictable share of losses.

Causes: incentives, selection, and pricing mechanics
Deductible design interacts with economic incentives and market selection. A higher deductible increases the marginal cost of filing a small claim for the policyholder, discouraging claims that the holder would otherwise file for minor losses. Insurers incorporate this behavioral response when setting premiums: holding coverage limits and other features constant, an insurer will lower a premium to reflect the reduced expected frequency of claims. At the same time, higher deductibles can alter the pool of buyers. Consumers with lower risk tolerance or a history of frequent claims tend toward low-deductible plans; consumers prepared to self-insure small losses prefer higher deductibles. That adverse selection effect constrains how far premiums fall as deductibles rise because a remaining low-risk pool would justify lower rates, while a high-risk pool would not.

Trade-offs and real-world impacts
Lower premiums from higher deductibles create trade-offs that have concrete social and territorial consequences. For lower-income households, a high deductible can be a barrier to necessary repairs or medical care, producing underinsurance. Research highlighted by Joseph P. Newhouse Harvard University indicates that while cost-sharing reduces utilization, some forgone care may reduce beneficial care as well as wasteful use. In regions facing rising climate-related losses, such as wildfire-prone zones, insurers have increasingly used higher deductibles as one response to higher expected losses; this shifts financial exposure onto homeowners and can accelerate displacement or property abandonment in vulnerable communities. Cultural factors also shape choices: populations with strong norms of mutual aid or with savings traditions may accept higher deductibles more readily than those who prioritize predictable monthly costs.

Practical considerations for consumers and markets
For individuals, choosing a deductible is a balance between monthly affordability and liquidity to cover out-of-pocket costs when a loss occurs. For insurers and regulators, deductible levels are a tool to manage moral hazard and control premium affordability, but they must be weighed against the risk of underinsurance, adverse selection, and inequitable impacts across income and geographic groups. Reliable public and academic sources such as the Insurance Information Institute and the research of Amy Finkelstein Massachusetts Institute of Technology and Joseph P. Newhouse Harvard University provide evidence-based perspectives on these trade-offs for policymakers and consumers.