What does the use of a co-insurance requirement encourage policyholders to do?

The use of a co-insurance requirement encourages policyholders to regularly update their insurance policies based on the current value of their property. Co-insurance is a provision in an insurance policy that requires the insured to insure their property to a certain percentage of its value (commonly 80%, 90%, or 100%) in order to receive full benefits in case of a loss.

If a policyholder fails to meet this requirement, they may face penalties in the form of reduced claim payouts, which incentivizes them to maintain adequate coverage in line with their property's market value. By regularly evaluating and updating their insurance policies, policyholders can avoid underinsurance and ensure they receive the full protection for their assets. This proactive approach supports financial security, especially in the event of a claim.

In contrast, options that suggest increasing coverage for higher value, reducing coverage to save on premiums, or neglecting policy evaluations do not directly relate to the intent of a co-insurance clause, which is specifically designed to mitigate the risk of underinsurance by motivating policyholders to stay informed and adjust their coverage as needed.