Difference Between Coinsurance and Reinsurance

Coinsurance and Reinsurance terminologies are closely associated with the insurance sector. However, the meaning and usage of both terms are different. Many people do not know the difference between the two. Keeping that in mind, we have come to let you understand the difference between these two terminologies i.e. Reinsurance and Coinsurance – in this article.

What is Reinsurance?

Reinsurance is a type of insurance purchased by an insurance company to mitigate the risk of loss. With reinsurance, an insurance provider can limit themselves from the potential loss of amount. In simple words, with a reinsurance policy, insurance providers can protect themselves from financial ruin and also protect the companies’ customers from such unforeseen uncovered losses. In other words, reinsurance is an insurance policy for insurance providing companies. With the help of reinsurance, insurance companies lower their risk of catastrophic events like a financial debacle. If an insurance company has a lot of risk exposure, any catastrophic event can cause the company to go into financial losses or worse can cause the company to close. Therefore, companies avail reinsurance policies to protect themselves from such events. Under reinsurance policies, the risk that is passed to the reinsurer is known as ‘Cession’, while the risk which is retained by the direct insurer is called ‘Retention’ or ‘Retained Line’.

Example of Reinsurance:

Suppose a life insurance company X has insured 10000 lives (aged 20) for INR 100000 each (total risk covered INR 1 crore), and if a new proposal is received by the same insurance provider of a person aged 20 but for INR 3 crore, in this situation, the company shall face the problem as they have to cover the risk of an additional INR 2 Crore as it will imbalance the insurance providers account if the newest entrant dies first. In this situation, the insurance provider can avail reinsurance to cover the risk of an additional INR 2 crores with another insurance providing company.

What is Coinsurance?

Coinsurance, as the name suggests, is the participation of one or more insurance companies to cover for the same risk. The risk covered under coinsurance is the same for all the participants and is agreed upon under mutual agreement. Each participant insurer accepts a pre-determined share under the insurance cover. The share that every participant owns under coinsurance is referred to as ‘quota share’.

Coinsurance commonly comes into picture when the volume of business to be covered is beyond the capacity of a single insurance provider, for example, industrial fire insurance or marine hull insurance, etc. Under Coinsurance, the risk is directly divided amongst the insurers as per the pre-determined agreement. Under Coinsurance, multiple insurance companies are direct insurers covering the original risk. The policyholder has a separate insurance contract with each of the insurers. Therefore, in the event of loss, the insured can file the claim against each insurer limited to the insurer’s share. In other words, under a coinsurance contract, all the co-insurers are not jointly but severally liable i.e. each insurer is liable only for own quota share. To simplify the handling of the coinsurance agreement, one of the direct insurers having the highest quota share is named as ‘leading insurer’.

Coinsurance by virtue of its scope and meaning is usually considered as similar to a co-pay facility under health insurance policies. Co-pay under health insurance policies is the amount that an insured has agreed to pay in the event of hospitalization. Coinsurance under the health insurance policy is a way of saying that insured and insurer agree to pay their share of the treatment cost.

Example of Coinsurance:

Coinsurance can be explained easily with the co-pay provision of health insurance policies. If you have a health insurance policy that states the co-pay terms as 80:20, where 80% is to be borne by insurer and 20% is to be borne by the insured. Similarly, under coinsurance, multiple companies share the risk of loss in the pre-determined percentage.

The essential difference between Reinsurance and Coinsurance:

1. Reinsurance is providing insurance for the risk that has been already taken up by an insurance company. While Coinsurance refers to sharing one risk amongst multiple insurance companies.
2. Reinsurance is considered as the transfer a part of the risk taken by the direct insurer to another or second insurer. The second insurer is known as the ‘reinsurer’. While in coinsurance all the parties to the agreement are direct insurers
3. Under reinsurance, the reinsurer has no direct connection to the policyholder or insured, while under coinsurance all insurers have a direct connection with the policyholder or insured.
4. Reinsurance is designed to limit the spread of risk associated with direct insurance. While coinsurance is designed to cover the risk that exceeds the capacity of one insurance company.