Final answer:
Insurance companies charge a fee called a premium to provide protection against financial losses. Deductibles, copayments, and coinsurance are various forms of cost-sharing that policyholders are responsible for, which reduce moral hazard and prevent the overuse of insurance services.
Step-by-step explanation:
Insurance companies protect their clients against financial losses from certain specified risks in exchange for a fee, called a premium. This premium is a regular payment made by households or firms to the insurance company, which is then used to cover the costs of any claims made by insured members when they suffer a specified loss.
Other terms related to insurance such as deductibles, copayments, and coinsurance are costs that the policyholder must bear. A deductible is the amount paid out-of-pocket before an insurance company covers the remaining costs. A copayment is a set fee that is paid before receiving certain services, and coinsurance is the percentage of costs that the insured party pays.
By requiring these forms of cost-sharing, insurance policies reduce moral hazard, which discourages overuse of insurance benefits by ensuring that the policyholder bears a portion of the risks.