Coinsurance and reinsurance, differences.
The day-to-day work of an insurance advisor makes you internalise and familiarise yourself with words and terms that are totally unknown to the average person, even though you may have heard them somewhere, you don’t really understand what they mean. That is why at futurseguros, as insurance specialists, we have decided to gradually create a dictionary of terms from the world of insurance and finance with an easy and accessible explanation for everyone.
What is coinsurance?
This is when the same risk (a building, a boat, etc.) is insured at the same time by several insurers, and each one has a percentage of the total insurance. If the boat has a claim and has to be indemnified, each one will pay up to the limit of its share. There is only one policyholder and several insurers.
What is coinsurance for?
I will try to explain it in the easiest possible way, insurance companies have to maintain a balance between their income (policy sales) and expenses (claims payments, among others), so they have to limit and adjust their commitments (each insurance policy sold can mean an indemnity), coinsurance allows them to continue selling more insurance policies by sharing the risks with other insurers.
What is reinsurance?
Reinsurance, we could understand it as insurance for insurers, I mean, an insurer sells policies and has some risks in its portfolio (possibility of claims in the policies sold), well, to guarantee that its assets cannot be affected if for some reason the loss ratio of its portfolio increases a lot, the insurer takes out reinsurance and partially or totally covers itself against these risks, obviously the insurer will have to pay the reinsurer for this guarantee.
Reinsurance does not eliminate or reduce the damage, but shares the financial incidence of claims between the insurer and the reinsurer.
What is reinsurance for?
To hedge against a possible increase of risks in the insurance portfolio, a possible miscalculation of the portfolio’s risks and to protect the company’s assets by guaranteeing the extent of the claims expenditure.
In practice, both reinsurance and coinsurance help companies to grow and sell more insurance policies. Without these two products, they would hardly be able to grow, since for every policy sold, there must be a financial backing (to pay claims).
I hope these two clarifications have been helpful, however, you can write to us and we will answer any questions you may have, and if you need a quote for your insurance, please contact us here.