Reinsurance tutorials #18
What is co-insurance?
Coinsurance is splitting or spreading risks among multiple parties. It can either be about sharing risks between the insured and insurer or between 2 or more insurers.
If there is an 80% coinsurance on the policy, it simply means that the insurance company is responsible for 80% of the risk while the insured is responsible for the rest – in this case, 20% plus deductible if applicable. Ultimately, it is a way for the insured and insurer to share responsibility for the risk. It can also help reduce the cost of the policy premium as a natural consequence of ceding less risk to the insurer.
Another form of coinsurance we often see and widely used in the European insurance market is when the risk is shared between various insurers. In this context, a common insurance contract is used and the risk is shared based on the percentages between the insurance companies. Usually, one insurance company leads the policy document, and that insurer would be responsible for different aspects of the policy document, including the claims and the premiums. In such a case, the insurance company will levy a charge to do so. What percentages of risks are to be carried out by the lead insurer and other co-insurance companies are specified in the beginning.
If there are several insurers participating in a policy, the lead insurer would be responsible for negotiating the premium, collecting the premium and accounting for any tax that needs to be paid with regard to the premium. Once the claim arises, it is the responsibility of the policyholder to inform the lead insurer who would be responsible for handling claims, including their investigation settlement and payment. Any expenses related to claim would be first paid by the lead insurance company which it can later recover from co-insurers, as per their share of risk. If the claim amount is low, the lead insurer can settle it on its own. There is no requirement for the lead insurance company to notify co-insurers about the claims, except in case of large claims.
However, in those cases where the claim is large, the lead insurer needs to inform co-insurers immediately and advise them of the progress.
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