Which formula is used to determine payment to an insured in the event of a loss?

The payment to an insured in the event of a loss is determined using a formula that takes into account the relationship between the insurance they have ('insurance carried') and the amount of coverage they should have ('insurance required'). The correct choice accurately reflects this relationship by stating that the formula is based on the ratio of insurance carried to insurance required, and then applies this ratio to the actual loss amount.

In this context, the insurance carried represents the level of coverage the insured has purchased, while the insurance required is the amount necessary to fully cover the loss based on the property's value. This is particularly relevant in cases where the insured has underinsured their property. The formula also subtracts the deductible, which is out-of-pocket expense the insured is responsible for before the insurance kicks in.

This method ensures that the insurer only pays out a proportion of the loss that is equal to the proportion of coverage the insured has purchased compared to what was necessary, adjusted by the deductible. This calculation is crucial for fair indemnification based on risk management principles, reflecting both the insured’s responsibility and the insurer’s potential liability.