What is the main purpose of coinsurance in an insurance policy?

The main purpose of coinsurance in an insurance policy is to require the insured to carry a percentage of the insurance coverage. This concept is particularly relevant in property insurance, where it is designed to encourage policyholders to insure their property for a value that reflects its actual worth. Coinsurance typically stipulates that the insured must maintain coverage at a specific percentage (commonly 80%, 90%, or 100%) of the property's value.

By including a coinsurance clause, the insurer aims to mitigate the risk of underinsurance, which can lead to significant financial losses if a property is damaged and the payout does not cover the eligible claim. When the insured fails to meet the required coverage amount, they may be penalized through reduced claims payouts, highlighting the importance of accurate and sufficient insurance coverage in protecting one's assets.

This focus on adequate coverage aligns with managing risk effectively within the insurance industry, ensuring that both the insurer and insured are better protected in the event of a loss.