Casualty Actuarial Society (CAS) Practice Exam

What does the coinsurance provision of business income policies encourage insureds to do?

1. Carry adequate amounts of coverage

2. Minimize risk exposure

3. Increase their deductibles

4. Limit business operations

The correct answer is: Carry adequate amounts of coverage

The coinsurance provision in business income policies is designed to promote the importance of carrying adequate amounts of coverage. It typically requires the insured to maintain a specified percentage of coverage relative to their actual business income and expenses. If the insured fails to carry this minimum level of coverage and subsequently experiences a loss, they may receive reduced claim payouts, which aligns with the calculated proportion of coverage they maintained. This provision encourages insureds to assess their exposure accurately and secure enough insurance to cover potential losses fully. By doing this, the aim is to ensure that businesses are financially prepared for interruptions, thus supporting their long-term viability and sustainability. This principle is fundamental in risk management practices, as it incentivizes businesses to accurately evaluate their operational income and align their policies accordingly to avoid underinsurance scenarios.