Coinsurance

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

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, coinsurance is sometimes used synonymously with copayment, 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. It can be expressed as a pair of percentages with the insurer's portion stated first, or just a single percentage showing what the insured pays. The percentage due from the insured can range up to 100% (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.

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.

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