Coinsurance is a formula frequently used by insurance companies. Although some of the different types of coinsurance may seem complex to people outside the insurance world, the truth is that, if they are explained well, they are relatively easy to understand.
And that is precisely what we are going to do at Euroteide Seguros, explain in a very clear and understandable way when it is understood that there is coinsurance, its different types, in which cases this formula should be used and its advantages and disadvantages.
What is coinsurance in insurance?
Basically, coinsurance is a collaboration agreement between two or more insurance companies, The purpose of which is for these insurers to share the risks covered by the same insurance contract. This implies that the following are also shared:
- Collection of the amount of the insurance policy premium
- In the event of an accident, the corresponding compensation payments to the insured
Types of coinsurance
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The type of co-insurance depends on the nature of the risk to be insured and the financial situation and/or strategic interest of each company involved in an operation of this type. The different types of co-insurance are as follows:
- Proportional coinsurance
All participating insurers share the risk and premiums proportionally. For example, if four insurers share a risk 25% each, they will also receive 25% of the premiums paid and will be responsible for paying 25% of the claims arising from any incident.
A relevant fact is that the risks They do not have to be shared equally by each co-insurer. That is, the insurance companies participating in a proportional co-insurance contract are free to negotiate and agree on what percentage of risk each of them assumes, a percentage that is transferred to the collection of the total premium of the policy,
- Non-proportional coinsurance
One or more insurers assume the risk only if the compensation exceeds pre-established amounts. Difficult to understand at first reading? Let's clarify it with an example:
Five companies sign a co-insurance contract with a total risk of 5 million euros, in which each company agrees to assume, in stages, up to one million euros.
An accident occurs with compensation amounting to two and a half million euros, in this case:
- The first company will pay one million euros.
- The second company will pay another million euros.
- The third company will pay only half a million euros.
- The fourth and fifth companies will not pay anything, since the other three have already covered the full amount of compensation.
Obviously, Companies obliged to pay compensation in the initial indemnity stages charge much higher percentages of the total premium than the latter.
- Mixed coinsurance
This is a modality that combines proportional and non-proportional risk assumption.
- Automatic coinsurance
In automatic coinsurance, insurers agree in advance to share equally in risks that meet certain predefined criteria.
For example, in the case of co-insurance of an oil plant involving four insurers, three companies may choose to jointly assume the risks arising from explosion and fire, while the fourth will take charge of the remaining risks.
- Optional coinsurance
This is the most flexible type of reinsurance for insurers: each insurer decides which risks it wants to insure and in what proportion. Obviously, it is necessary to negotiate so that all risks are covered.
An additional meaning for the concept of co-insurance
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We clarify that in some American countries, such as Mexico, there is a second meaning for the concept of co-insurance. In these countries, co-insurance is also called co-insurance.
Contract by which an insurer fully assumes the risks that until then were covered by another insurance company, without altering the terms of the original contract signed by the insured with the transferee company.
In other words, it is a complete transfer of rights and obligations between two insurance companies that does not affect the insured. In Spain, this type of contractual operation is called reinsurance.
Entities whose sole purpose is co-insurance
In developed countries, it is common to find organizations whose specific purpose is co-insurance contracts.
For example, in our country the Spanish Association of Combined Agricultural Insurance Insurance Entities operates. It is not an insurance company, but a pool co-insurance scheme in which several of the main insurance companies in our country participate.
As its name indicates, the purpose of this body is none other than to guarantee, through a co-insurance system, that the astronomical compensation payments that would result from a natural catastrophe, disease or plague that massively affects a large part of the agricultural holdings in a district, region or autonomous community can be met.
What are the characteristics of co-insurance?
This is an insurance formula whose main distinguishing features are the following:
- Although the liability of the insurers is joint, is not supportive. That is, each company is exclusively responsible for the risks assumed.
- The co-insurance contract must be accepted unanimously by all insurance companies involved.
- In the contract a specific company must be designated, which will be responsible for acting as a spokesperson for the insured and coordinating the other insurance companies.
Advantages and disadvantages of co-insurance
These are your main advantage:
- Coinsurance allows for the coverage of risks whose compensation would be unaffordable for a single insurance company.
- The risk of non-payment of compensation due to financial incapacity by insurers is reduced to a minimum.
- Virtually any type of risk can be assumed, regardless of its nature and probability of occurrence.
As for drawbacks:
- Greater administrative complexity: coordination between multiple insurers can complicate administrative management, both for insurers and for the insured.
- If unforeseen disagreements arise between insurers over liability and payout ratios, the time to receive compensation in the event of a claim may be extended.
- More complex claims procedures for the insured.
And once we have explained what co-insurance is, we remember that in Euroteide Insurance (Insurance Advisors), we have mediation agreements with the main Spanish companies, including those that regularly carry out large insurance operations using the co-insurance modality.