What is meant by depreciation in the context of insurance?

Depreciation, in the context of insurance, specifically refers to the loss of value of an asset due to age, wear and tear, and obsolescence. As an asset ages, its utility and market value typically decrease, which insurers consider when underwriting policies or assessing claims.

When an insured event occurs, the insurer evaluates the asset's current value rather than its original purchase price to determine compensation. This method ensures that the insured does not profit beyond the actual value of the loss, adhering to the principle of indemnity in insurance—that is, restoring the insured to their prior financial position without gain.

The other choices pertain to concepts that do not align with the definition of depreciation. For instance, the increase in value of an asset over time describes appreciation, while the total value covered by a policy refers to the insured limit, and the percentage of deductible applied to a claim relates to out-of-pocket expenses the insured must pay before coverage kicks in.