In risk management, what does the term "deductible" mean?

In risk management, the term "deductible" refers to the specific amount that the insured is required to pay out of pocket before an insurance policy activates its coverage for a claim. This means that in the event of a loss or damage, the insured must first cover expenses up to the deductible amount; only after this threshold is met does the insurance provider begin to reimburse or cover the remaining costs associated with the claim.

Deductibles are a crucial aspect of insurance policies because they help mitigate the insurer's risk by ensuring that the insured has some financial responsibility in the event of a loss. They are designed to discourage frivolous claims and encourage policyholders to manage their risks carefully. The higher the deductible, the lower the premium might be, and vice versa, as the insurer takes on more risk when the deductible is lower. This balance helps both insurers and insureds engage in more responsible risk management practices.