Question

Which of the following types of deductibles is most effective at mitigating moral hazard?

Straight deductible

Aggregate deductible

Franchise deductible

They are all equally effective

Answer 1

Straight deductible

Deductibles reduces moral hazard since the insured tries to prevent the loss so that he himself is protected against the payment of deductible. In a straight deductible, the insured pays a damage before the insurer is required to pay.

Aggregate deductibles are an amount to be paid by the insured for all losses sustained during a specific period of time . Hence beyond the aggregate amount, the moral hazard will not be mitigated. In franchise deductible, if the amount of loss> franchise, the insurer pays the entire amount of loss, hence it attracts moral hazard.