Coinsurance

Coinsurance is a term with two main meanings in insurance. In US health insurance, it is the percentage of a covered medical bill the patient pays after meeting the deductible: under 20% coinsurance, the patient pays 20% and the plan 80%. In property insurance, a coinsurance clause requires the owner to insure property for at least a stated percentage of its value, often 80%, or have claim payments reduced in proportion.

A third usage, often written co-insurance, describes several insurers each taking a direct share of one risk under a single policy, as is common for large commercial and industrial risks. Each co-insurer is in a contract with the policyholder, which distinguishes co-insurance from reinsurance, where the reinsurer contracts only with the original insurer. All three meanings share one idea: the cost of a loss is split rather than carried by one party.

In health insurance, coinsurance is like splitting a restaurant bill after a voucher. You pay the first part yourself (the deductible), and after that you and the plan share each bill in a fixed ratio until a yearly cap is reached.

In property insurance, think of a club where members chip in according to what they own. If someone declares a house worth half its real value to pay a smaller subscription, it is fair that they get back only about half of any claim. The coinsurance clause enforces that: insure close to the full value and claims are paid in full, up to the limit; insure far too little and every claim is cut back.

US health plans usually combine three cost-sharing features. A deductible is paid first; coinsurance then applies as a percentage of each covered bill, while a copayment is a fixed amount, such as $30 per visit; and an annual out-of-pocket maximum, required for most plans under the Affordable Care Act, caps what the patient pays for covered in-network care in a year. Traditional Medicare Part B also uses 20% coinsurance for most covered services after its annual deductible.

For example, a patient with a $1,000 deductible and 20% coinsurance receives a $5,000 covered hospital bill early in the year. The patient pays the first $1,000, then 20% of the remaining $4,000, or $800, for a total of $1,800; the plan pays $3,200. Once the patient's spending reaches the out-of-pocket maximum, the plan pays 100% of covered costs for the rest of the year, a feature that works like stop-loss protection for the patient. Cost sharing aims to reduce moral hazard by giving patients a reason to weigh the cost of care, though critics argue it can deter people from needed treatment.

A commercial property policy with a coinsurance clause pays a claim according to how well the property is insured:

• Insurance carried is the policy limit the owner bought.
• The coinsurance percentage is the minimum share of value that must be insured, such as 80%, 90% or 100%.
• Value at time of loss is usually replacement cost or actual cash value, depending on the policy.
• The payment can never exceed the loss or the policy limit, and the fraction is capped at 1.

A building is worth $1,000,000 and the policy has an 80% coinsurance clause, so it should be insured for at least $800,000. The owner carries only $600,000, then suffers a $200,000 fire loss with a $5,000 deductible. The fraction is 600,000 ÷ 800,000, or 0.75, so the insurer pays 0.75 × $200,000 − $5,000 = $145,000, rather than $195,000. The penalty exists because premiums are set as a rate per unit of value insured; without it, owners could insure a fraction of value and still collect in full on the partial losses that make up most claims. Owners can avoid the clause with an agreed value endorsement, and they need to revisit values regularly, since inflation in building costs can push a once-adequate limit below the threshold. Lenders that rely on the building as security for a mortgage also check that limits keep pace.

For a large risk, such as an airport or a refinery, several insurers may each write a percentage of a single policy. A lead insurer sets the terms, handles underwriting and claims, and is followed by the others, an approach familiar from the subscription market at Lloyd's of London. Each co-insurer's liability is several, not joint: if one fails, the others do not pay its share, so the policyholder bears the counterparty risk of each participant.

Co-insurance also helps where local rules require a domestic insurer to lead, and it lets insurers limit concentration risk on any one client without buying facultative reinsurance. When a co-insured loss is caused by someone else, the lead usually pursues subrogation for all participants. Coinsurance and other conditions are often only summarised in an insurance binder, so policyholders should check the full wording once the policy is issued.

• HealthCare.gov
• Medicare.gov
• National Association of Insurance Commissioners (NAIC)