Registered Insurance Brokers of Ontario (RIBO) Practice Exam

How does co-insurance affect an insurance payout?

1. It guarantees full payout regardless of value

2. It reduces the payout amount based on the insured value

3. It has no effect on the payout

4. It limits payouts to only 50% of losses

The correct answer is: It reduces the payout amount based on the insured value

The correct answer highlights that co-insurance affects the payout amount based on the insured value and the actual value of the property at risk. Co-insurance is a provision commonly found in property insurance policies. It requires the policyholder to insure their property for a certain percentage of its total value; typically, this is set at 80%, 90%, or 100%. If the policyholder fails to insure the property for at least the required co-insurance percentage, they may face a reduced payout in the event of a claim. The calculation considers the ratio of the amount insured to the value of the property. For example, if a property is worth $100,000 and is only insured for $70,000 instead of the required $80,000 under an 80% co-insurance clause, the payout for a loss would be calculated accordingly, resulting in a reduced payout that reflects this underinsurance. In contrast, other choices do not accurately reflect how co-insurance operates. Some suggest that it guarantees a full payout, which contradicts the nature of co-insurance. Others imply that co-insurance has no effect on payouts or that it limits payouts to a fixed percentage, which is not how this concept functions. Thus, understanding the implications