How Coinsurance Works

What is coinsurance?

Coinsurance is the sharing or spreading of risks between several parties. This may involve sharing the risks between the insured and the insurer or between two or more insurers.

If the insurance policy provides for an 80% coinsurance, the insurance company covers 80% of the risk while the insured is responsible for the rest (20% plus deductible if applicable). It is a way for the insured and the insurer to share the responsibility for the risk. It can also contribute to reducing the cost of the insurance premium, a direct consequence of reducing risk for the insurer.

Another form of coinsurance widely used in the European insurance market is sharing risk between several insurers. Thus, a standard insurance contract is used, and the risk is shared according to the coverage percentages between the insurance companies. An insurance company is generally responsible for drawing up the insurance policy document. It becomes accountable for the various terms, including claims and premiums (against payment by the insurance company in charge). The percentages of risks borne by the primary insurer and the other coinsurance companies are specified at the beginning of the insurance policy document.

How Coinsurance Works

Coinsurance takes the form of one or more insurance contracts by which insurance companies undertake to bear part of the risk that the insured seeks to cover.

Where there is a single contract or policy, one of the companies, generally referred to as the opening company, will be responsible for negotiating and coordinating the allocation of risk and the terms under which each will be responsible.

If there are multiple contracts, each company will set its terms in its agreement or policy.

It is worth mentioning that there is a concept related to coinsurance called reinsurance. In this case, the insurance company pays another insurance company to assume part of the risk that the first one took. Reinsurance works similarly to coinsurance, but it is not the same. This is an internal decision, and vis-à-vis the customer, the initial insurance company remains responsible for 100% of the risk.

Coinsurance features

Coinsurance has the following essential characteristics:

• There are at least two insurance companies.
• The insurance companies are known to the insured.
• The insured pays each company its share of the premium.
• Each of the companies assumes a portion of the risk or premium.
• The insurance companies are independent of each other.
• There is a direct relationship between the insured and the insurance companies.
• The insured can claim its share of risk coverage (each company pays part of the compensation in the event of the covered event).