Co-insurance is an operation allowing several insurance companies to guarantee the same risk or a set of risks by means of a single contract. Insurers often have difficulty guaranteeing certain risks because of the importance of the capital to be covered and/or the risk which symbolizes the amounts to be insured. To remedy this, insurers have developed a process called coinsurance. What is this system?
Co-insurance: to limit the commitment of insurers
Co-insurance is a practice allowing 2 or more insurers to share the insurance of a large business.
Description of coinsurance?
Co-insurance allows several insurers to jointly undertake a guarantee to cover a significant risk by jointly limiting their commitment to levels that suit them. The process is used to guarantee professional risks and within the framework of industrial risks of certain importance. Thanks to co-insurance, insurers avoid having to compensate a loss of too high an amount on their own. This guarantee is also used to cover certain risks at the express request of the customer. For example, a municipality may take out co-insurance on all of its property, favoring the insurers of the municipality in order to offer them a market.
How does coinsurance work?
To better understand the principle of co-insurance, let’s take as an example 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 takes into account the buildings, the contents, and the recourse of neighbors and third parties. The insurance company informs the manager of the company that it is prepared to guarantee damages at the rate of 35%. This means that the insurer can cover the maximum possible loss of 35% of the guaranteed capital (40 million euros). In this case, the manager of the company will have to find co-insurers to cover the remaining 65% of the risks. There may be 3 co-insurers, one agrees to compensate 25% of the capital covered in the event of a claim and the other 2 20% each.
How coinsurance works
As we explained previously, the co-insurance operation is orchestrated by the leading insurer, who is responsible for both collecting the premium and settling claims. Here is how he must proceed to honor his position:
1) The leading insurer collects the entire premium, and transfers to each co-insurer the percentage of the premium corresponding to their share. It is he who will be responsible for collecting the contribution and who 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 which he has withheld).
How does co-insurance materialize?
The materialization of co-insurance is a horizontal division of damages. As opposed to reinsurance, this system can be practiced in 2 ways: by separate policy or collective policy.
Separate fonts
By opting for separate policies, each participant determines his own policy for the full amounts to be covered. Thus, each insurer will have to establish a policy in such a way that each of them must cover the entire risk. It will be necessary to add a simple clause indicating that the insurance company declares to indemnify 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 as well as their respective shares.
What about cumulative insurance?
In the case where there is no designation and the various insurers do not want to discuss this co-insurance, this system makes it possible to establish cumulative insurance. This means that the insured has taken out several insurance contracts to cover one and 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 compensation for the claim is distributed in proportion to the number signed guarantees. This precaution is very important, 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 co-insurance should not be confused. Reinsurance is considered the insurance of insurers. Co-insurance is also different from the pools established by insurers in order to share the guarantee of very special 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.
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. It is therefore 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.
