Simplifying Life Insurance in India
What Are the Differences Between Reinsurance And Coinsurance?
Reinsurance and coinsurance are policies made for insurance companies themselves. They get themselves covered under these plans to curtail their potential risks of financial loss. These policies help them easily settle a coverage amount which is very high or beyond their capacity.
Nevertheless, there are some subtle differences between reinsurance and coinsurance policies, especially in terms of their nature of coverage.
What Is a Reinsurance Contract?
Reinsurance is a type of financial agreement between two insurance companies. In this agreement, the reinsurer provides coverage to an insurance agency in case it fails to provide financial coverage to customers.
This reinsurance policy reduces potential risk factors of a covered insurer and assists it financially in times of crisis. It safeguards an insurance company from the risk of insolvency and financial debacles.
What Is a Coinsurance Contract?
Coinsurance is an agreement between insured individuals and a group of insurance companies. Two or more insurers stay involved in this contract and cover the loss or damages that occurred to their customers’ insured items.
Coinsurance companies determine their share of risk before entering into the agreement. This phenomenon of pre-specified risk distribution is known as 'quota-share'. They settle their part of the coverage in case the financial loss meets terms and conditions of the policy.
Difference between Reinsurance vs Coinsurance
The table mentioned below highlights the differences between reinsurance and coinsurance:
|
Criteria |
Reinsurance Policy |
Coinsurance Policy |
|
Risk holding agent |
Reinsurance covers the risk of an insurance company to some extent. You can see it as a transfer of one insurance company’s risk to another agency. |
Coinsurance shares the risk among all insurance companies involved in the agreement. All become liable to pay their proportionate insured amount separately. |
|
Agent(s) covering the claim |
End customers will have to place their claim to the insurance company from which they purchase their policies. They do not need to be aware of the reinsurance policy that their insurance companies purchase. |
All insurers are separately liable to pay the coverage. Customers need to claim the amount from all those involving insurers. |
|
Decision on policy terms |
The reinsurance company sets terms and conditions of this plan, and the primary insurance company agrees to those. |
In a coinsurance policy, the insurance company that shares the maximum risk is called a ‘leading insurer’. This leading insurance company mainly manages the agreements of a coinsurance policy. |
|
Reason for issuing the policy |
Reinsurance policies help an insurance company restrict its risk of being insolvent. This is because it gets coverage in case the claim amount is higher than expected. |
This type of policy helps insurance companies extend a high coverage that may be beyond a single agency's capacity. |
|
Payees of the policy |
An insurance company pays its premium to another agency in this reinsurance policy. |
The premium amount paid by individual customers is shared among all insurance companies involved in this coinsurance policy. |
|
Example |
Let’s consider that an insurer has sold its insurance policy to 10,000 people, and the coverage amount of each policy is ₹ 1 Crore. If the company gets claim requests for ₹ 1.5 Crore from the new entrants, it will face difficulties in bearing the additional amount of ₹ 50 Lakh. However, with a reinsurance plan, it can secure itself financially and cover that additional expense. |
Let’s consider insurance companies A, B, and C agree on a quota share of 40%, 30% and 30%, respectively, against an insurance plan with a sum insured value of ₹ 50 Crores. Then A, B and C will be liable to cover up to ₹ 20 Crores, ₹ 15 Crores and ₹ 15 Crores, respectively. |
From the differences between reinsurance and coinsurance mentioned above, you can infer that both help an insurance company to reduce risks by distributing them. In a reinsurance policy, the insurance company purchases a policy from another company to secure financial protection.
On the other hand, a coinsurance policy lets insurance companies distribute the total risk among themselves in a predetermined order.
FAQs About the Differences Between Reinsurance and Coinsurance
How does a reinsurance policy benefit the insurance company?
How does the coinsurance policy help an insurance company?
A coinsurance agreement helps insurers dilute the total coverage of a policy in which the insured amount is beyond the risk capacity of a single company. For example, if a large-scale organisation wants to get a fire insurance policy, it will be highly risky for one insurer to engage in this type of financial agreement.
With a coinsurance plan, its risk can be distributed among other participants, and thus, they can easily manage the coverage.
What is meant by the line size in a reinsurance policy?
What are the different types of reinsurance policy?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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