Final answer:
The claim that a higher deductible reduces insurance coverage is false; it only increases the out-of-pocket cost before coverage starts, which can lead to lower premiums as it decreases the insurance company's risk. Deductibles, copayments, and coinsurance are tools to reduce moral hazard and insurance costs.
Step-by-step explanation:
The statement that a higher deductible reduces the amount of coverage provided by homeowner's insurance, and therefore results in a lower insurance premium, is false. A higher deductible does not reduce the amount of coverage; instead, it means the policyholder must pay a larger amount out of pocket before the insurance coverage kicks in. This higher out-of-pocket cost can lead to lower premiums because it reduces the insurer's risk.
Insurance policies, including homeowner's insurance, often include deductibles as a way to share costs and reduce moral hazard. Moral hazard is the concept where people with insurance may take greater risks or act less carefully because they know the insurance will cover the losses. To combat this, insurance companies use deductibles because it requires the policyholder to have some 'skin in the game' and ensures they will act more responsibly to avoid financial loss. Additionally, other methods of cost-sharing include copayments and coinsurance which also serve to reduce the overall cost to insurers and thereby can lower premiums for policyholders.