What is average in insurance

Condition of average (also called underinsurance in the U.S., or principle of average, subject to average, or pro rata condition of average in Commonwealth countries) is the insurance term used when calculating a payout against a claim where the policy undervalues the sum insured.

What is the meaning of average in insurance?

To protect Insurers in this scenario, the policy contains a Condition of Average. Simply the Condition of Average says that if you declare an insured value that is X% of the true value, then you have only paid X% of the premium due and will only receive X% of your claim.

How do you calculate average in insurance?

The drum set is under-insured by 30%, calculated by dividing the difference between the sum insured and the replacement value. Due to the understatement of the insured value the insurer will apply the average clause and reduce its pay-out by the same percentage.

How is average insurance loss calculated?

The loss ratio formula is insurance claims paid plus adjustment expenses divided by total earned premiums. For example, if a company pays $80 in claims for every $160 in collected premiums, the loss ratio would be 50%.

What do you mean by under insurance?

Underinsurance occurs when the sum insured on your insurance policy — that is, the amount listed as the maximum we'll pay out if you make a claim — isn't enough to cover the full cost of rebuilding, repairing or replacing your home and its contents.