Which of the following statements applies to replacement cost valuation?

The statement that insurers may require policyholders to replace insured items before making full reparations best aligns with the principles of replacement cost valuation. Under a replacement cost policy, the insurer typically covers the cost to replace the damaged or destroyed property with new property of similar kind and quality, without deducting for depreciation. This means that, in many cases, the policyholder must indeed replace the item in order to receive the full amount of the replacement value in claims. This approach encourages policyholders to maintain their property at current standards rather than older or depreciated versions, ensuring that repairs are made with materials that reflect today’s standards and conditions.

In contrast to this, other statements present misunderstandings about replacement cost valuation. For instance, replacement cost does not factor in depreciation (ruling out the first statement). The idea that replacement cost policies provide cheaper premiums than actual cash value policies is not accurate universally, as premium costs can vary significantly based on coverage limits, deductibles, and other factors specific to the policies. Similarly, an actual cash value policy generally pays out less than a replacement cost policy because it subtracts depreciation to calculate the payout, which makes the last statement incorrect.