There are two reasons for the deposit.
The first reason is that the deposit covers the difference repairing the damage and the cost of claiming for the damage on the insurance.
To reduce premiums, Insurance policies normally have an excess amount meaning they will not pay out on the first €x of any claim. Claim for €500 with a €200 excess and they will pay €300. You can pay hire higher premiums to reduce the excess.
In this case, if you return a car with a scratch, it could cost maybe €200 to repaint it as new. And another €300 when you include time and effort involved in getting it fixed and lost earnings from the car not being available hire out to others. Claiming on the insurance will get the hire company that €200 back (minus the excess), but cost time and effort and out-of-pocket expenses to make the claim. All of which comes out of your deposit.
The second reason is that even though you can almost always reduce or even eliminate the deposit by paying a higher insurance premium, the idea that you know you will lose up to €730 for even a small amount of damage, you are likely to be more careful while driving it.