What does "coverage mismatch" refer to?

"Coverage mismatch" specifically refers to situations where the insurance coverage does not align with the actual risk exposure that an individual or entity faces. This concept is critical in insurance because for effective risk management, a policyholder must ensure that their insurance coverage adequately reflects the level of risk they are exposed to.

If coverage does not match the risk, it can lead to either underinsurance, where the policyholder is not sufficiently protected in the event of a claim, or overinsurance, where the insured is paying for more coverage than necessary for their actual risk. This misalignment can result in significant financial implications when a loss occurs, as the policyholder may find themselves unprotected or paying unnecessary premiums.

Understanding this concept helps policyholders make informed decisions when selecting insurance plans and coverage amounts, ensuring that they are neither over-protected nor under-protected against potential risks they may face.