Coinsurance is defined as the sharing of risk between an insurer and an insured. The insured bears a part of damages or claims after the predetermined deductible is satisfied by the insured under the insurance contract.
Applicability of Coinsurance
#1 – Health Insurance
The insured shares the health-related costs if the insurance contract has a coinsurance clause. The proportion of expenses that will be shared by the insured is known at the time of initiation of the insurance contract.
These contracts also have other necessary clauses like annual out-of-pocket deductible and out-of-pocket maximum. An out-of-pocket deductible is the maximum initial cost (excluding co-pay, which is a fixed amount that the insured pays at every visit) that will be borne solely by the insured in a year. Any cost over and above the deductible in a particular year is shared by the insurer and the insured in a pre-decided ratio (generally 80:20). An out-of-pocket maximum is a maximum loss that the insured will bear annually (including the deductible) and any loss over and above that will be borne solely by the insurance company.
#2 – Property Insurance
In property insurance, a coinsurance clause requires the property to be insured for an agreed minimum percentage of the property’s replacement value. A penalty is imposed at the time of the claim if the insurance company finds out that an insufficient cover (lower than the coinsurance clause) was bought on the insured property.
#3 – Title Insurance
Now discontinued, there used to be a coinsurance clause in U.S. title insurances till 2006. Under these contracts, the insured used to share the loss with the insurer if the title was not insured for a minimum of 80% of its market value.
The following are some examples of coinsurance.
An individual bought insurance with a coinsurance clause wherein losses will be shared by the insured and insurer in the ratio 80:20. If the loss amount during the term was $1,000, the insurer would only pay $800, and the balance $200 will be borne by the insured.
Example #2 – Health CoInsurance
Assume that someone bought a health insurance policy with an 80/20 breakdown. In this contract, losses will be shared by the insurer and insured in an 80:20 ratio. If the insured went through a medical procedure that cost $2,000, her insurer would pay up $1,600, while she will put in the balance $400. If the same contract has an out-of-pocket deductible clause of $500, she will bear the first $500 herself, and the balance will be shared by her ($300) and the insurer ($1200) as per the pre-decided ratio.
In case there is a maximum out-of-pocket clause, the insured will stop sharing the loss once she has paid the maximum amount of loss agreed upon in the contract in a particular year. If we assume the maximum out-of-pocket as $1,000 in this case, the insured will stop sharing the cost once the overall cost crosses $3,000.
Health Coinsurance Illustration
- Coinsurance Ratio: 80:20
- Insurer Share: 80%
- Insured Share: 20%
- Out-of-Pocket Deductible: $500
- Out-of-Pocket Maximum: $1,000
|Healthcare Cost (Annual Cumulative)||$500||$1,000||$2,000||$3,000||$4,000||$5,000|
|Out-of-Pocket Deductible (Paid by Insured)||$500||$500||$500||$500||$500||$500|
|Balance(shared by both parties)||–||$500||$1,500||$2,500||$3,500||$4,500|
|Paid by Insured||–||$100||$300||$500||$500||$500|
|Paid by Insurer||–||$400||$1,200||$2,000||$3,000||$4,000|
Example #3 – Property CoInsurance
An 80% coinsurance clause on a property valued at $100,000, requires the property to be insured for at least $80,000. If the property is insured for a lesser $60,000, the insurer will charge an underreporting penalty in the form of a lower payout.
In case there is a $40,000 loss in the property during the term of the contract, the insurer will only pay damages proportional to actual cover and the cover required under the contract. In this case, it will be $30,000, and the balance $10,000 loss will be borne by the insured (without deductible) as an underreporting penalty.
Refer to the table below:
|Replacement Value of the Property (A)||$100,000|
|Coinsurance Required (B)||80%|
|Required Cover (C) = (A*B)||$80,000|
|Insurance Value (D)||$60,000|
|Loss paid by the Insurer (F) =(D/C * E)||$30,000|
|Underreporting Penalty (E-F)||$10,000|
Some contracts require 100% coinsurance, making it important to report accurate property values to avoid heavy underreporting penalty.
Advantages of CoInsurance
The following are the advantages of coinsurance.
- Affordable premiums with higher deductibles and maximums (good for younger people who do not incur high medical costs). The insurer pays in case of runaway medical costs
- Entire costs are borne by the insurance company if the out-of-pocket maximum is reached early in the year (beneficial for people who require regular medical attention)
- In property insurance, property gets adequately covered to avoid underreporting penalty
- Reduces the cost for insurance companies as the insured chip in with their share of loss
- Help the insurer adequately price property insurance
Disadvantages of Coinsurance
The following are the disadvantages of coinsurance.
- High out-of-pocket deductibles and out-of-pocket maximums increase the overall cost of insurance.
- The high cost of insurance if the patient chooses to go to out-of-network healthcare providers (out-of-network hospitals/clinics are expensive than in-network hospitals/clinics).
- The increased cost of servicing the policies issued to patients who require great medical attention
A coinsurance is a win-win situation for both the insured and the insurer as it reduces the cost for the insurer and provides adequate support to the insured in case of a sudden spike in healthcare costs.
In property insurance, coinsurance is an important tool to nudge the property owners to reveal the true replacement/cash value of the property and buy an adequate cover, helping the insurance company offer the right price for its policies.
This has been a guide to what coinsurance is and its definition. Here we discuss the applicability of coinsurance with examples and advantages, disadvantages. You can learn more from the following articles –