Insurance

How To Calculate Contribution In Insurance

Methods To Calculate Contribution In Insurance

If we want to Calculate Contribution In Insurance, then a few things should be checked. Once it is established that the factors which influence the application of the principle of contribution – are satisfied and contribution is to apply then the next course is to find out the liability under each insurance policy. Usually, this is on the sum-insured basis under each policy and is commonly known as proportionate liability or respective liability of each policy.

The formula applied to Calculate Contribution In Insurance is = (Sum-insured under each policy x Loss)/ Total sum-insured under all policies. Lets have a look on some examples:

Example 1 To Calculate Contribution In Insurance :

Policy A … Sum-insured… $ 1000

Policy B … Sum-insured …$ 2000

Policy C … Sum-insured …$ 4000

Say, Loss  $ 700, then

Policy A pays, (1000×700)/7000=$100

Policy B pays, (2000×700)/7000=$200

Policy C pays, (4000×700)/7000=$400; total pay equals the loss $700

Example 2 To Calculate Contribution In Insurance:

Policy A … Covers property I ……….…Sum-insured $ 1000

Policy B … Covers property II & III …. Sum-insured $ 2000

Policy C … Covers property II & III …. Sum-insured $ 4000

Say, Loss $ 333 to property II , then

Policy A does not contribute anything as property II is not covered.

Policy B &C only contribute as property II is covered.

 Policy B pays, (2000×333)/6000=$111

Policy C pays, (4000×333)/6000=$222; total pay equals the loss $333

Example 3 To Calculate Contribution In Insurance:

Policy    Property              Sum Insured      Policy Period                      Perils Covered

A             I                               1000                       1.1.16 to 31.12.16             Fire

B             I                               1000                       -Do-                                       Lightning

C             I                               1000                       -Do-                                       Fire

D             II                             1000                       -Do-                                       Fire

E              I                               1000                       1.1.16 to 30.6.16            Fire

Say, Loss $500 to Property II by Fire on 2.7.16.

On careful observance it would be noticed that the policies are not exactly identical. There is difference of property, policy period and perils in some of the policies. The contribution will be as follows : Policy B does not come into picture as it does not cover fire, policy D does not come into picture as it does not cover property I. Policy E does not come into picture as the loss took place after the expiry of the policy. Therefore, only policies A and C contribute to the loss as under :

Policy A Pays, (1000 X 500)/2000=$ 250

Policy C Pays, (1000 X 500)/2000=$ 250, total pay equals the loss $500

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