Coinsurance is an operation allowing several insurance companies to guarantee the same risk or a set of threats using a single contract. Insurers often have difficulty ensuring certain risks because of the importance of the capital to be covered and the danger which symbolizes the amounts to be insured. To remedy this, insurers have developed a process called coinsurance. What is this system?
Coinsurance: to limit the commitment of insurers
Coinsurance is a practice allowing two or more insurers to share the insurance of a large business.
Description of coinsurance?
Coinsurance allows several insurers to jointly undertake a guarantee to cover a significant risk by limiting their commitment to levels that suit them. The process is used to guarantee professional risks in the context of industrial dangers of particular importance. Thanks to coinsurance, insurers avoid compensating a loss of too high an amount on their own. This guarantee is also used to cover certain risks at the customer’s express request. For example, a municipality may take out coinsurance on all of its property, favoring the city’s insurers to offer them a market.
How does coinsurance work?
To better understand the principle of coinsurance, let’s take a business manager who wishes to study the guarantee to cover a furniture factory. After analyzing his project, he estimates the capital to be covered at 40 million euros. This exorbitant cost considers the buildings, the contents, and the recourse of neighbors and third parties. The insurance company informs the company manager that it is prepared to guarantee damages at the rate of 35%. The insurer can cover the maximum possible loss of 35% of the insured capital (40 million euros). In this case, the company manager will have to find co-insurers to cover the remaining 65% of the risks. There may be three co-insurers. One agrees to compensate 25% of the capital covered in the event of a claim and the other 2 20% each.
How does coinsurance materialize?
The materialization of coinsurance is a horizontal division of damages. As opposed to reinsurance, this system can be practiced in 2 ways: by separate policy or collective policy.
By opting for separate policies, each participant determines their approach for the total amounts to be covered. Thus, each insurer will have to establish a policy so that each of them must protect the entire risk. It will be necessary to add a simple clause indicating that the insurance company declares to repay only a part of the risk representing a certain percentage of the total capital to be covered. The insurance contract presented by each insurer specifies the designation of each intervening participant and their respective shares.
What about cumulative insurance?
If there is no designation and the various insurers do not want to discuss this coinsurance, this system can establish cumulative insurance. The insured has taken out several insurance contracts to cover the same risk. So that the customer avoids a total forfeiture of compensation, company directors in a situation of cumulative insurance must quickly declare to each insurer concerned the presence of other contracts so that the payment for the claim is distributed in proportion to the number of signed guarantees. This precaution is essential because the law specifies that the total compensation must, in no case, exceed the value of the goods covered. The reason is that insurance cannot be a source of profit.
Reinsurance and coinsurance should not be confused. Reinsurance is considered the insurance of insurers. Coinsurance is also different from the pools established by insurers to share the guarantee of extraordinary risks such as insurance for large construction sites, risks relating to environmental pollution, atomic risks, etc. The pools represent a reinsurance system in which all the risks underwritten to the protection company are obligatorily redirected.
Group policies are the most common method of coinsurance. In these situations, the different insurers participating in the contract called co-insurers offer customers a single insurance policy. This document indicates other designations such as the situation, the guarantees granted, the applicable rates of the various co-insurers as well as the amount of their commitment, the nature of the contract (premises and activities carried out by the covered company), the insured capital, corresponding premiums, declarations, and particular clauses.
The co-insurers will be able to manage the collective policy by designating a leading company or a leading insurer. The leading insurer is always one of the co-insurers. The insurance company often participates in the most significant indemnification risk. This rule is not mandatory since the leading company plays a role that can also be provided by the company behind the coinsurance or the one consulted by the client for the first time.
The objective of the leading insurer is to manage the contract, to represent all the co-insurers. The latter will entrust him with all the management tasks of the contract. The leading insurer is responsible for assessing the rate applicable to the risk, sending the notices of premium expiry, paying the share due to each co-insurer. This premium varies according to the rate by paying the taxes to the Public Treasury. The leading company is also responsible for drawing up the policy, the premium receipts, and endorsements, collecting the premium and examining the claims files, paying all the indemnities, and collecting the co-insurers share.
The leading insurer acts on behalf of all co-insurers. He is often the only one to sign the insurance policy with the client. This approach involves all co-insurers. Usually, the customer will never know which other insurance agencies are engaged in covering any claims. The signatures of all the insurers appear in an acceptance document saved in the archives of the leading company. It should be noted that the co-insurers can withdraw their participation or reduce the amount covered after having indicated the contract manager. In this case, they will have to contact one or more other insurance agencies to replace this change in decision.