What is Depreciation? - Insurance Navy. Depreciation is a term used in insurance and accounting to describe the gradual decrease in the value of a tangible asset over time due to factors such as wear and tear, age, or obsolescence. This concept is essential in insurance because it can affect the compensation an insured party receives for a damaged or lost asset. In insurance, depreciation is often used by insurance claim adjusters when determining the actual cash value (ACV) of an insured item. The ACV is calculated by subtracting the depreciation from the replacement cost of the item. For example, if a five-year-old laptop has a current cost of $1,000 when a new one is stolen, the insurance company would calculate the depreciation based on the laptop’s expected life expectancy and subtract that amount from the original cost to determine the payout.
Depreciation can also be relevant in property insurance, where it can affect the amount of reimbursement a policyholder receives after a loss.