What is Adequacy of Coverage?

Adequacy of coverage refers to whether insurance or hedging has been used to provide a sufficient level of loss protection for an asset. For example, a business owner takes out flood insurance to provide coverage for his business. Adequacy of coverage involves measuring the extent to which the insurance coverage covers the value of the business. For example, the policy might provide $500,000 of coverage, but it does not provide for the effects of inflation on the replacement cost of the business; consequently, the adequacy of coverage for the business is steadily declining over time.

This is not a quantitative measurement, for the adequacy level depends on the ability of the individual or business to absorb losses, as well as the frequency of expected losses.