What is the main purpose of an excess in an insurance policy?

The main purpose of an excess in an insurance policy is to establish the threshold for a claim payout. This is the amount of money that the insured agrees to pay out of pocket before the insurance coverage kicks in and the insurer begins to pay for the remaining costs of a claim. By having an excess, both the insured and the insurer can manage risk; the insured is incentivized to avoid small claims, while the insurer reduces the number of minor claims they have to process.

In contexts where the excess is applied, the insured must bear a portion of the financial responsibility, which allows the insurer to keep premiums lower for the policyholder, as it reduces the insurer's liability exposure. Therefore, this mechanism also serves to provide a balance between coverage and self-financed risk for the insured, acting as a cost-control measure for both parties involved in the insurance agreement. Thus, having an excess defined in a policy is fundamental in determining when and how much the insurer will start paying on claims made by the insured.