Is Coinsurance Becoming Obsolete?
1981; Wiley; Volume: 48; Issue: 1 Linguagem: Inglês
10.2307/252654
ISSN1539-6975
AutoresMichael L. Smith, David L. Bickelhaupt,
Tópico(s)Housing Market and Economics
ResumoEvidence gathered from large personal lines insurers suggests dissatisfaction with the traditional insurance-to-value requirement. The traditional requirement may not fully remove the incentive to underinsure which is present in nearly all property insurance contracts. Underinsuring is regarded as a major problem by insurers because it adversely affects their costs. Alternatives to the traditional insurance-tovalue requirement are examined in the light of their effectiveness as loss-sharing devices and their effect on costs and incentives. Nearly 15 years ago, the vice president of a large personal lines insurer expressed a wish that coinsurance requirements one day would be eliminated. 1 Today, coinsurance clauses still are used, but important changes have taken place. Accumulating evidence suggests coinsurance clauses are becoming obsolete in personal lines insurance. However this evidence does not suggest that the coinsurance clause will vanish completely overnight. Considering that coinsurance clauses have been used in the United States for more than a century, [6, p. 1], they should not be expected to disappear rapidly. Despite widespread use, coinsurance has not been popular with insurance buyers. A few jurisdictions have passed laws restricting or prohibiting its use [12]. Yet coinsurance remains a firmly rooted tradition in some lines of insurance, particularly commercial lines. Its continued use is explained partly by its effect in reducing the insured's incentive to underinsure, as reducing the incentive is in the insurer's interest. Because coinsurance may not completely remove the insured's incentive to underinsure, alternative methods often appear attractive to insurers. The scope of this study includes coinsurance as used in property and related insurance lines. (The replacement cost clause used in Homeowner's Insur
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