Rhode Island Insurance Adjuster Exam

What is the primary purpose of co-insurance in insurance policies?

1. To increase the premium paid by the insured

2. To split the risk between the insurer and the insured

3. To eliminate the need for deductibles

4. To ensure full coverage of the insured amount

The correct answer is: To split the risk between the insurer and the insured

Co-insurance serves as a mechanism to distribute risk between the insurer and the insured. In the context of an insurance policy, co-insurance typically requires the policyholder to maintain a certain level of coverage that corresponds to the value of the insured property. If the policyholder fails to maintain this required amount, they may face penalties, often resulting in a reduced payout in the event of a claim. The core idea behind co-insurance is that both parties share the financial risk associated with the insured asset. This encourages policyholders to purchase adequate insurance coverage and mitigates the insurer's risk exposure. Ultimately, co-insurance aims to promote responsible underwriting and ensures that both the insurer and the insured are invested in maintaining appropriate levels of coverage. While the other options might touch upon aspects of insurance policies, they do not accurately capture the fundamental concept of co-insurance. For instance, it does not primarily serve to increase premiums, eliminate deductibles, or guarantee full coverage without regard to the value of the asset.