Coinsurance refers to the sharing of risk between the insurer and insured, sometimes also called copayment or copay. It can also mean the sharing of risks between at least two title insurance companies.
In most of Europe’s international insurance market, coinsurance refers to the second meaning – the joint assumption of risk between a number of insurers.
Coinsurance, in which several insurers share the risk, is widely used in the European insurance market. Usually, one insurance firm will lead – it will be responsible for various aspects of the insurance policy including the premium, claims, as well as the insurance documents. In such cases, a charge is levied, known as lead office commission.
In health insurance, coinsurance refers to the amount that the policyholder is required to pay for a medical claim, apart from any copayments or deductible that may also be applicable.
In health insurance, coinsurance generally has the same or a very similar meaning to copayment. However, copayment is usually fixed while coinsurance is a percentage that the insurance company pays after the insured’s policy’s deductible is exceed up to the limit of that policy.
Imagine, for example, that Mary Smith’s health insurance plan’s allowed amount for consulting a doctor (office visit) is $100 and her coinsurance is 20%.
– If she has paid her deductible, she pays $20 – 20% of $100 – while the insurer pays the rest.
– If she has not met her deductible, she will pay the full amount, i.e. $100.
Let’s say the following amounts apply to her plan and she needs a great deal of treatment for a serious condition. And allowable costs are $12,000, deductible comes to $3,000, coinsurance is 20%, and out-of-pocket maximum is $6,850.
Ms. Smith will pay all of her deductible – the first $3000. She will pay 20% of the remaining $9,000, or $1,800 (her coinsurance). Therefore her total out-of-pocket costs would be $4,800 – her $3,000 deductible plus her $1,800.
If her total out-of-pocket costs come to $6,850, she would pay only that amount, including her deductible and coinsurance. For the rest of her plan year, the insurer would pay for all covered services.
In most cases, plans with cheaper monthly premiums have higher coinsurance, while those with higher monthly premiums have lower coinsurance.
Commercial Property Coinsurance: in the event that an insured has a loss and you need to determine whether they fall within the coinsurance allowance, follow these simple formulas. (Source: ‘Facts You Should Know About Commercial Property Coinsurance‘)
Coinsurance is imposed by the insurance company on the insured – a kind of penalty – for under-reporting, under-insuring or under-declaring the tangible property’s value or business income.
Coinsurance under a property policy, in broad terms, is define as the ‘sharing of risk between an insurer and the insured… normally expressed as a percentage.’ If an insurance policy is subject to a coinsurance requirement, it means that the owner of the policy needs to satisfy the specified criteria whenever there is a loss claim.
The majority of claims are just for partial loss; therefore, insuring for less than the total asset value may be advantageous, because your annual premiums will be lower. However, be careful, in the event of a total loss, unless you have lots of private funds, you will not be able to replace what you have lost.
The following is a simple example for calculating the requirement for property coverage with a lower coinsurance amount.
Imagine John Brown’s building and all contents are currently valued at $900,000 at replacement value, and his coinsurance requirement is stipulated to be eighty percent of the replacement value.
Based on the details above, Mr. Brown is required to insure his property and pay corresponding premiums for at least $720,000 in replacement coverage.
If Mr. Brown insured for less than this amount he would face a coinsurance penalty. In the following formula, you can see a scenario in which the coinsurance requirement is not met. In this case, his insurer would only pay the percentage of his total loss up to the value of his insurance coverage.
— Merlin Law Group (@MerlinLawGroup) August 18, 2015
Lets assume that Mr. Brown had purchased $650,000 of building and contents insurance and he suffered a partial property loss – the cost of repairs were $300,000 and he had a $1,000 deductible. His insurance company would calculate how much they owed him in the following way:
$650,000 insurance carried over $720,000 insurance required (as calculated above) = 90.3% loss reimbursement.
90.3% of the $300,000 loss claimed, less $1,000 deductive, equals $269,900 that the insurance would have to pay.
Therefore, Mr. Brown would personally pay for $29,100 of his $300,000 partial loss claim because his policy did not carry enough insurance (plus his $1,000 deductible).
If he had initially purchased the insurance required and suffered a $300,000 loss, he would have had at least 80% coverage on the $900,000 valued of his insured property and would have only been liable for the $1,000 deductible.
“Understanding the impact of insufficient insurance coverage is invaluable in setting the right terms for your policy and avoiding costly penalties should you need to make a claim. The level at which you should insure your assets is a decision between you and your insurance broker. Your accountant can assist by providing important information on decisions relating to your insurance needs.
According to The Free Dictionary, coinsurance is:
“A provision that provides that the insurance company and the insured will apportion between them any loss covered by the policy according to a fixed percentage of the value for which the property, or the person, is insured.”
— Group Health (@grouphealth) January 12, 2016