The term coinsurance can refer to two different concepts, both related to insurance and the sharing of risk among several parties.
Several coexisting insurances
Coinsurance, by this definition, is an insurance contract underwritten on the one hand by the insured and on the other hand by several insurers who assume with complete independence from each other the obligation to respond separately to the part of the risk corresponding to them. In short, it is a sharing of risk and insurance premiums between insurance companies, which in turn may cede it through their automatic contracts or special reinsurance programs. Coinsurance should not be confused with reinsurance or deductible, although in some way internally they are interrelated, since part of the coverage provided by an insurer in coinsurance may be reinsured in turn.
It is feasible that an insurer may not be able to respond financially to the totality of a risk because it does not transfer its full coverage and this is when the figure of coinsurance appears, by virtue of which several insurers intervene independently in the insurance.
Thus,
- there are several insurers;
- the distribution of insurance companies is made by the insured, the insurance broker or the companies themselves according to their capacity to assume a specific risk;
- the loss is borne by several insurers (individually);
- there is a direct relationship between the insured (client) and the insurers.
Payment of a portion of a claim by the insured
In addition to the above definition, in some countries, the word coinsurance is a figure of insurance law applicable to major medical expense contracts.
It is defined as the percentage to be paid to the insured of the loss caused by the claim. The application of coinsurance seeks to ensure that the insured uses hospitals and physicians whose fees are adequate to recover health and avoid excess expenses.
Generally, the amount of coinsurance can be agreed with the insurer under the following rule: the higher the premium, the lower the coinsurance amount and vice versa. Usually the hospital collects the coinsurance at the time of the patient’s discharge and credits the payment to the insurer’s debit. Coinsurance and deductible may apply to a major medical claim. Some insurers offer policies with coinsurance capped at a certain amount, which allows the insured to know with certainty how much he/she will pay in deductible and up to how much in coinsurance.
For all-risk policies covering business assets, or property in general, coinsurance is nothing more than the ratio of the insured value to the full value of the insurable interest. For example: we insured a building for one million dollars but it costs 4 million dollars to reinsure it (at the time of the loss), so we have only insured 25% of it and we have a coinsurance of 75%. This implies that we are only entitled to receive from the insurer 25% of our partial loss or the sum insured in case of a total loss.
The concept of coinsurance, in this definition, contrasts with that of copayment in that coinsurance is a percentage of cost and copayment is a fixed cost.
