In the context of coinsurance, how is the insurer's payment calculated?

In the context of coinsurance, the insurer's payment is determined using the formula DID/SHOULD X Loss, where DID represents the amount of insurance carried (or the insured value), SHOULD refers to the amount of insurance that should have been carried according to the coinsurance requirement, and Loss is the amount of the loss incurred.

This calculation is vital because it ensures that policyholders maintain a minimum amount of coverage in relation to the value of the property insured. If the insured amount is less than the required amount, the payout will be reduced proportionally. This mechanism incentivizes policyholders to insure their properties adequately to avoid penalties in the form of diminished claims when losses occur. Thus, this formula captures the essence of coinsurance by linking the payout directly to the coverage that aligns with the actual loss incurred, promoting equitable sharing of risk between the insurer and insured.