Final answer:
The insurance term for the cost to replace lost or damaged property with new items of the same type and quality is called the replacement cost. It differs from coinsurance, where the policyholder and insurance company share the cost of losses, and does not factor in depreciation like the actual cash value does.
Step-by-step explanation:
The dollar amount calculated by an insurance company to replace your property with new items of the same type and quality is known as the replacement cost. When assessing policy payments, insurance companies consider both coinsurance, where the policyholder pays a percentage of a loss, and actual cash value, which is the depreciated cost of the item. However, with replacement cost coverage, depreciation is not accounted for, thereby enabling the policyholder to replace their lost or damaged items at current market prices, assuming a similar kind and quality.
An example of how insurance assessments operate can be drawn from auto insurance. If a group of drivers experiences accidents resulting in varying damages with associated costs, and there is no way initially to distinguish between low, medium, or high-risk drivers, everyone could be charged a flat rate. However, if drivers can be classified by risk, then the insurance rates can be tailored accordingly. This concept of customized premiums based on risk classification leads to what is deemed as an actuarially fair insurance premium that mirrors the average losses of each risk group.