Question

From the insured's perspective (i.e. the perspective of the person/entity who has purchased insurance), the use of deductibles in insurance contracts is an example of

a) Risk avoidance
b) Risk retention
c) Risk transfer
d) Risk reduction

Answer 1

Deductibles in insurance contracts exemplify risk retention from the insured's perspective, as they indicate the insured's financial share in potential losses, thereby reducing the moral hazard associated with having insurance coverage.

Step-by-step explanation:

From the perspective of the insured, the use of deductibles in insurance contracts is an example of risk retention. Deductibles require the policyholder to pay an initial portion of the loss themselves, which means they retain some of the financial risk. By having deductibles, copayments, and coinsurance, insurance companies ensure that the policyholders share in the cost of the covered loss or health care services, thereby reducing moral hazard. These cost-sharing mechanisms make policyholders partly responsible for the financial consequences of their claims, which may discourage excessive claims and promote careful behavior.

All of these forms of cost sharing are designed to reduce the moral hazard, which occurs when people take more risks because they have insurance protection against losses. By requiring the insured to bear a portion of the costs, the insurance model balances risk transfer with risk retention and provides a financial incentive for the policyholder to avoid unnecessary claims or to mitigate potential losses.