Thanks for your comment.

This simplification is done a lot in practice. For a small number of events (or projects) and for small amounts, it is a proxy that can be used and is totally ok to apply. The approach should always mirror the complexity of the environment of an event / a project.

It does not work on a wider more complex basis.

a) for insurance companies, this approach would lead to bankruptcy with a probability of 100% (this can be even mathematically proven). And this helps nobody, especially not to insureds who would lose their capital and protection.

b) for insureds this approach would lead to underinsurance (most people are underinsured but this approach would lead to a systematical bias of underinsurance) as the upper tails of risks would not be considered (and this is the part that financially hurts)

c) for the shareholder it would lead to a negative ROI (insurance is a low margin business and only little volatility leads to a loss), and finally, less income for a country (investments, consumption, taxes)

So, the whole society would suffer because the insurance industry account for 7.4% of the global GDP - one can imaging how many jobs are linked to that industry. The environment is quite complex and with such a simplified approach they could not manage the large number of different risks and amounts, especially the ones that have no cap. It's the right approach in the right situation.