South Dakota Crop Insurance Practice Exam

What is the function of coinsurance?

1. The insurer pays all claims without limits

2. The insured shares in the loss payment

3. The policyholder receives benefits in full

4. To avoid underwriting restrictions

The correct answer is: The insured shares in the loss payment

Coinsurance is designed to involve the insured in the financial risk associated with claims. By having the insured share in the loss payment, it encourages them to manage their risks and protect their property more diligently. This sharing arrangement typically means that the insurer will cover a certain percentage of the loss, but only if the insured maintains a specified amount of coverage relative to the value of the property. If the insured fails to maintain this required amount of coverage, they may not receive the full benefit of the claim, thereby motivating the insured to ensure that their property is adequately covered. In contrast, the other options do not accurately represent the nature of coinsurance. For example, if the insurer paid all claims without limits, it would eliminate the incentive for the insured to protect their property. Similarly, if the policyholder received benefits in full, it would negate the core purpose of coinsurance, which is to require the insured to take on some risk. Lastly, coinsurance does not primarily serve to avoid underwriting restrictions; rather, it is a method to align incentives between the insurer and insured regarding coverage levels.