ordinary deductible

When you claim on your car insurance, the insurer often does not pay the whole bill. You agree up front to cover the first, say, 500 yourself; the insurer pays only the part above that. That first slice you absorb is an ordinary deductible. It keeps tiny claims off the insurer's books and makes you a little more careful, in exchange for a lower premium.

Precisely, with an ordinary deductible d, if a loss X occurs the insurer pays the amount above d, that is max(X - d, 0). A loss of 300 with a 500 deductible produces a payment of zero; a loss of 1,200 produces a payment of 700. Note the key contrast with a franchise deductible: under an ordinary deductible the deductible is always subtracted, so a 1,200 loss pays 700, not the full 1,200. Two views of the same modification matter: the per-loss view counts the zero payments from small losses, while the per-payment view conditions on a payment actually being made (loss above d).

Deductibles are everywhere in insurance, and their actuarial effect is precise and useful: they reduce both the frequency of payments (small losses now produce nothing) and the average size of the payments that remain. This is summarised by the loss elimination ratio. The honest caveat is a frequent confusion: an ordinary deductible does not just lop a fixed amount off the average claim — it changes which claims are paid at all (small ones vanish) and reshapes the whole payment distribution, so its effect on the expected payment must be computed, not guessed by simple subtraction.