Define and differentiate: Coinsurance, Reinsurance

19.07.2019
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What is CoInsurance?

Coinsurance is the amount, generally expressed as a fixed percentage, an insured must pay against a claim after the deductible is satisfied. In health insurance, a coinsurance provision is similar to a co-payment provision, except co-pays require the insured to pay a set dollar amount at the time of the service. Some property insurance policies contain coinsurance provisions. Coinsurance also applies to the level of property insurance that an owner must buy on a structure for the coverage of claims.

Breaking Down CoInsurance
One of the most common coinsurance breakdowns is the 80/20 split. Under the terms of an 80/20 coinsurance plan, the insured is responsible for 20% of medical costs, while the insurer pays the remaining 80%. However, these terms only apply after the insured has reached the term’s out-of-pocket deductible amount. Also, most health insurance policies include an out-of-pocket maximum that limits the total amount the insured pays for care in a given period.

CoInsurance Example
Assume you take out a health insurance policy with an 80/20 coinsurance provision, a $1,000 out-of-pocket deductible, and a $5,000 out-of-pocket maximum. Unfortunately, you require outpatient surgery early in the year that costs $5,500. Since you have not yet met your deductible, you must pay the first $1,000 of the bill. After meeting your $1,000 deductible, you are then only responsible for 20% of the remaining $4,500, or $900. Your insurance company will cover 80%, the remaining balance.
If you require another expensive procedure later in the year, your coinsurance provision takes effect immediately because you have previously met your annual deductible. Also, since you have already paid a total of $1,900 out-of-pocket during the policy term, the maximum amount that you will be required to pay for services for the rest of the year is $3,100. After you reach the $5000 out-of-pocket maximum, your insurance company is responsible for paying up to the maximum policy limit, or the maximum benefit allowable under a given policy.

What is ReInsurance?

Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses. The simple explanation is that reinsurance is insurance for insurance companies. Reinsurance is the mechanism that insurance companies use to lower their risk or reduce their exposure to a specific catastrophic event.
If an insurer has too much exposure to a potentially costly event, then that event could cause the company to go bankrupt or even shut down if it’s unable to cover the loss. For example, when Hurricane Andrew caused $15.5 billion in damage in Florida in 1992, seven U.S. insurance companies became insolvent because they were unable to pay claims resulting from the disaster.
As a simplified example, let’s say you run a small auto insurance company and you’ve collected a total of $10,000 in premiums from your customers this year. However, if one of your customers gets into a serious accident, it could easily create a claim for which you would have to pay out several times that amount. So you use a portion of the premiums you receive to purchase a reinsurance contract that will payout in the event of an exceptionally large loss.

ReInsurance Example

In life insurance, the actuary can predict with some certainty as to how many lives of a given age will die within a certain period. What he cannot forecast is which of the named persons will exactly die. This ignorance or limitation of knowledge, in fact, has aggravated the necessity of reinsurance further. If a life company has 100000 lives all aged 20 and each insured for $10,000, and if this company now gets a fresh proposal from a man aged 20 but for an amount of $30,000 then problems would arise since the company shall have to run the risk of an additional amount of $20000 which will definitely imbalance the account if simply the new entrant dies first. Therefore, this company shall feel the necessity of getting its load ( $20000 in this case) reinsured with another company.

Difference Between CoInsurance and ReInsurance

Coinsurance in medical health (casualty) is sharing of costs between insurer and insured, and in property insurance it is were the risk( one risk) is shared between different insurance companies. Reinsurance is insurance for an insurance company, where by an insurance companies seeks for indemnification in case that a stated loss takes place. Facultative reinsurance is a form of reinsurance in which the terms, conditions, and reinsurance premium is individually negotiated between the insurer and the reinsurer. There is no obligation on the reinsurer to accept the risk or on the insurer to reinsure it if it is not considered necessary. The main differences between facultative reinsurance and coinsurance is that the policyholder has no indication that reinsurance has been arranged. In coinsurance, the coinsurers and the proportion of the risk they are covering are shown on the policy schedule. Also, coinsurance involves the splitting of the premium charged to the policyholder between the coinsurers, whereas the reinsurers charge entirely separate reinsurance premiums.

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