Final answer:
An excess insurance policy provides secondary coverage and pays after the primary insurance, with policyholders first responsible for costs through deductibles, copayments, or coinsurance. These cost-sharing measures prevent moral hazard by making insured parties bear some financial risks.
Step-by-step explanation:
If an insurance policy is stated to be "excess," it implies that this policy acts as a secondary layer of coverage that will only begin to pay once the primary insurance has addressed the claim up to its limits.
Essentially, an excess insurance policy offers additional protection beyond what the primary insurance covers. Various forms of cost-sharing strategies are common among insurance policies, such as deductibles, copayments, and coinsurance.
A deductible is a set amount the policyholder is required to pay out-of-pocket before the insurance covers the rest of the expenses.
A copayment is a standard fee that must be paid before a service is rendered. Meanwhile, coinsurance involves the policyholder paying a fixed percentage of the loss, with the insurer covering the remaining cost.
These mechanisms are significant because they aim to reduce moral hazard by ensuring that the policyholders also bear a portion of the financial risk, which can incentivize the insured to act more cautiously and prevent overutilization of insurance benefits.