Co-insurance

Coinsurance in insurance, is the splitting or spreading of risk among multiple parties.

In the United States

In the U.S. insurance market, co-insurance is the joint assumption of risk between the insurer and the insured. In title insurance, it also means the sharing of risks between two or more title insurance companies.

In health insurance

In health insurance, coinsurance is sometimes used synonymously with copayment,^[1] but copayment is fixed while the coinsurance is a percentage that the insurer pays after the insurance policy's deductible is exceeded, up to the policy's stop loss.^[2] It can be expressed as a pair of percentages with the insurer's portion stated first,^[3] or just a single percentage showing what the insured pays.^[4] The percentage due from the insured can range up to 100%^[5] (100% meaning the insured pays all costs until reaching the out of pocket maximum). Once the insured's out-of-pocket expenses equal the stop loss the insurer will assume responsibility for 100% of any additional costs. 70–30, 80–20, and 90–10 insurer-insured coinsurance schemes are common, with stop loss limits of $1,000 to $3,000 after which the insurer covers all expenses.^[6]

In property insurance

Coinsurance is a penalty imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of tangible property or business income. It also applies without a concealment for the insured to bear some sort of responsibility and thus reduce moral hazard. The penalty is based on a percentage stated within the policy and the amount under reported. As an example:

A buildings replacement cost actually valued at $1,000,000 has an 80% coinsurance clause but is insured for only $750,000. Since its insured value is less than 80% of its replacement value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty. For example, if it suffers a $200,000 loss, the insured would recover $750,000 ÷ (0.80 × 1,000,000) × 200,000 = $187,500 (less any deductible). In this example, the underreporting penalty would be $12,500. More generally, suppose a building with replacement cost R is insured for amount I, with a coninsurance requirement c, expressed as a number between 0 and 1 (e.g. 0.8 for an 80% coinsurance clause). If this building suffers a loss L, then the insurance payout (less deductibles) would be the smallest of the three amounts, L, I, and IL/(cR). The first two alternatives reflect the fact that the payout will not exceed the loss nor the amount the building was insured for, while the last amount represents the intended action of the coinsurance requirement to penalize underreporting.

The most commonly issued coinsurance percentage would be 80% but it can be as high as 100%, which would impose the greatest penalty for underreporting. For this reason, it is vital for values of property to be accurately reported and updated annually to reflect inflation and other increases in cost.

In title insurance

Owner's title insurance policy forms of the American Land Title Association created between 1987 and late 2006, contain coinsurance clauses. For partial losses, they require the insured carry a percentage of the risk of loss in two circumstances. The first is if the insured did not insure its title for at least 80% of its market value at the time the policy was issued. In that case, the insurer will pay only 80% of the loss. The second is if improvements constructed on the property after the policy is issued increase the property's value by at least 20% above the amount of the policy. In that case, the insurer will pay a percentage of the claim equal to the ratio of 120% of the amount of insurance purchased divided by the sum of the amount of insurance and the cost of the improvements.^[7]

Coinsurance is also used among U.S. domestic title insurers in a manner similar to that described below for the international insurance market.

In other insurance

In some cases, including employer's liability insurance, coinsurance percent denotes a function analogous to the copay function that it has in health insurance, in which the insured covers a certain percentage of the losses up to a certain level.^[8]

In business income interruption insurance, a type of time-element insurance,^[9] the coinsurance percent indicates how long the coverage will last, and can range from 50% to 125%. The former coinsurance allows for 6 months of coverage, compared to 15 months for 125%.^[10]

In Europe

In the international insurance market, coinsurance refers to the joint assumption of risk between various insurers.

Coinsurance is generally widely used in the European insurance market. In this context, a common insurance contract is used and the risk is shared based on percentages between the insurance companies. Often, one insurance company will lead. When leading the insurance company will be responsible for administering various aspects of the insurance policy, such as premium, any claims and the insurance documents. In this situation, a charge is levied (termed lead office commission).

See also

• Cost sharing

References

External links

• Insurance to Value from the Casualty Actuarial Society