Which of the following involves no financial compensation until a certain loss is reached?

The concept of a franchise deductible is unique in that it involves an arrangement where no payment is made by the insurer until losses exceed a specified threshold. In this structure, if the loss incurred is less than that predetermined amount, the insurer will not provide any compensation; however, once the loss surpasses that figure, the insurer covers all losses incurred beyond that point.

For instance, if a franchise deductible is set at $1,000 and a policyholder experiences damages amounting to $800, there will be no compensation provided. But if the damages amount to $1,200, the insurer will pay the entire $1,200. This approach creates a significant incentive for policyholders to manage smaller risks themselves while allowing insurers to reduce their administrative costs associated with smaller claims.

This makes the franchise deductible particularly useful in commercial insurance policies where businesses may encounter variable losses over time. Understanding this mechanism helps policyholders better navigate their insurance choices based on their risk exposure.