What is the benefit of establishing a deductible in an auto insurance policy?

Establishing a deductible in an auto insurance policy serves the purpose of lowering the premium by sharing the risk between the insurer and the insured. When a deductible is set, the insured agrees to pay a certain amount out-of-pocket before the insurance company starts to cover the costs of claims. This arrangement reduces the insurer's risk, as they know that they will not be responsible for the initial portion of any claim, thus allowing them to offer lower premium rates.

This arrangement encourages policyholders to take more responsibility for minor claims, as they might choose to handle smaller repairs themselves instead of filing a claim, which can ultimately keep insurance costs lower for everyone. The presence of a deductible also helps to reduce moral hazard, as it incentivizes insured individuals to avoid unnecessary claims.