Coinsurance is the horizontal sharing of the same risk between several insurance companies, each guarantor of the only part it has agreed to cover. Each company, therefore, undertakes to take a share (in percentage) of the risk that it decides to co-insure.
This operation implies that each insurer will receive a premium rate amounting to the same percentage as its commitment rate in the total coverage of the risk. This also means that each insurance company will always have to pay the claim(s) (if the risk occurs) according to the percentage corresponding to its level of commitment in the coverage of the risk.
There is no solidarity between the co-insurers in coinsurance; thus, if one of the co-insurers does not pay its share in the compensation of a loss, it is not the others who will deliver it in its place. Each co-insurer must pay only the percentage of the loss that he has undertaken to assume.
Example: Three insurance companies, A, B, and C, co-insure a building against fire. Company A undertakes to insure 30% of the risk, company B 20%, and company C 50%. The total premium requested from the insured to ensure his property is 100.
The co-insured building burns down after the contract is taken out. The experts establish that the claim is valid of accidental origin and that damage amounts to 100,000.
→ According to the rules of coinsurance, here is the amount of premium that each insurance company receives at the time of subscription of the contract:
– Insurer A receives a 30 premium.
– Insurer B receives 20 premiums.
– Insurer C receives a 50 premium.
→ After the claim, each insurer will be obliged to pay the amount of compensation to the insured (assuming that there was no compensation ceiling in the coinsurance contract).
– Insurer A must pay compensation of 30,000 to the insured
– Insurer B must pay compensation of 20,000 to the insured
– Insurer C must pay compensation of 50,000 to the insured
The role of the leading insurer in coinsurance
The leading insurer is the insurer who establishes and manages the policy and the claims on behalf of all the other co-insurers. Therefore, it is vested with a general mandate to act on behalf of the other co-insurers.
It is important to emphasize that the leading insurer is not necessarily the insurer with the largest share.
How coinsurance works
As we explained previously, the leading insurer orchestrates the coinsurance operation and is responsible for collecting the premium and settling claims. Here is how he must proceed to honor his function:
1) The leading insurer collects the entire premium and transfers the percentage of the premium corresponding to their share to each co-insurer. He will be responsible for managing the contribution and will have to take legal action in the event of non-payment.
2) The leading insurer handles claims and generally settles all of the compensation due to the insured by exercising recourse against each co-insurer up to the amount of their respective share (the leading insurer does not is, however, bound to pay the indemnity only up to the percentage he has retained).