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Updated on July 18, 2023

Coinsurance refers to a shared insurance arrangement between an insurer and a policyholder in which both parties agree to share the cost of covered losses or claims. In a coinsurance agreement, the policyholder agrees to pay a percentage of the claim amount, while the insurance company pays the remaining portion.

What are the pros and cons of using coinsurance?

Cost Sharing – Coinsurance allows policyholders and insurers to share the financial burden of claims, potentially reducing premiums for policyholders.
Incentive for Adequate Coverage – By involving policyholders in sharing the risk, coinsurance provisions incentivize them to maintain sufficient coverage for their assets and properties.
Risk Management – Coinsurance helps insurers manage their risks by limiting their payout in the event of a claim, leading to more stable pricing structures.

Out-of-Pocket Expenses – Coinsurance can result in policyholders paying a larger portion of claim costs, leading to higher out-of-pocket expenses.
Complexity and Confusion – Understanding and complying with coinsurance requirements can be complex for policyholders, increasing the likelihood of confusion.
Potential Underinsurance – There is a risk that policyholders may underestimate the value of their assets, leading to inadequate coverage despite coinsurance provisions.
Coinsurance Penalties – Failure to meet coinsurance requirements may result in penalties, reducing the amount the insurer pays for a claim, even within policy limits.