Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What is the formula for calculating co-insurance in insurance policies?

1. Did minus should x amount of loss

2. Did divided by should x total value

3. Did over should x amount of loss

4. Did times should x premium rate

The correct answer is: Did over should x amount of loss

The formula for calculating co-insurance involves a proportionate calculation comparing the amount of insurance purchased to the amount of insurance that should have been purchased based on the value of the property at risk. The correct choice provides a straightforward representation of this relationship: the amount of insurance that is in place, often referred to as "did," is divided by the amount that should be in place, known as "should." This calculation results in a ratio that is then multiplied by the loss incurred to reflect how much of that loss the insurer is responsible for paying. Essentially, it assesses whether the policyholder has adequately insured their property and determines the payout based on the underinsurance scenario. In the context of insurance, if the policyholder has taken out less insurance than the required amount based on the property's total value, the co-insurance clause comes into effect, leading to a reduced payout at the time of a claim. This understanding underscores the importance of proper valuation and coverage levels in insurance policies to ensure adequate protection against potential losses.