Premium and Policy Value

Most straightforward insurance problems ask you to move between three quantities: the sum insured, the premium rate, and the premium — given any two, find the third.

Insuring a fraction of the property's value

Policyholders often insure a property for only a part of its worth (say $80\%$), which lowers the premium but exposes them to the average clause (§4).

Policy value as a fraction of property value

If a property worth $V$ is insured for a fraction $k$ of its value, the sum insured is

$\text{Sum insured}=k\times V,$

and the premium is charged on that sum insured, not on the full value $V$.