Explain what is meant by under-insurance, Other Subject

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Question:

a) Explain what is meant by under-insurance and why clients engage in same?

b) Penny Sue insures her car for Rs 500,000 for a one-year period. The market value of this car is currently Rs 750,000. The insurance policy has an excess of Rs 15,000. One month after taking the policy, Penny Sue meets with an accident.

i. In the event of a total loss claim, how much would she get from her insurer?

ii. In the event of a claim estimated at Rs 100,000, how much would she get from her insurer?

iii. In the event of a claim estimated at Rs 15,000, how much would she get from her insurer?

iv. If the policy had a deductible of Rs 15,000 instead of an excess of 15,000, how would this change your answer to parts (i) to (iii) above?

c) List three ways insurance companies can use to reduce under-insurance and discuss their effectiveness in practice


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