Coinsurance is a term used in the insurance industry that refers to the sharing of risk.¬† Depending on the line of business, coinsurance can have different meanings.
When used in relations to health care insurance, coinsurance refers to a pre-agreed cost-sharing arrangement.¬† After the insured has met their¬†deductible, coinsurance defines the cost-sharing split between the insurer and the insured up to a certain threshold.
In the Property & Casualty insurance sector, coinsurance can be used to identify the spread of risk between two insurance companies.¬† It is also used to establish limits for buildings and other property (primarily commercial.)¬† While the usage is somewhat counter-intuitive, the process is designed in the best interest of the insured.
Typically you will see the insurance clause in a commercial property policy set at 100% coinsurance, 90% coinsurance, and 80% coinsurance. At first blush, it would appear that 100% coinsurance was the most conservative choice why at 80% coinsurance¬†the insured might be exposed to 20% of the loss.¬† THIS IS INCORRECT.
At 100% coinsurance, the insured has coverage up to the limit stated in the policy.¬† That’s okay, right? It’s¬†¬†okay until the replacement cost exceeds the limit.¬† Then the insured is on the hook for the difference.
At 80% coinsurance,¬†the insured has the ability to protect themselves from have a replacement cost¬† estimate that is too low.¬† An 80% coinsurance clause gives the additional protection.¬† At 80% coinsurance, the limit on the structure is now effectively 125% (100/80) of the stated value.