What Are the Differences Between Reinsurance And Coinsurance?

What Is a Reinsurance Contract?

What Is a Coinsurance Contract?

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? up-arrow

Insurance companies become able to provide a customer with the agreed insurance coverage by averting a certain percentage of their financial challenges. ‘Cession’ is the percentage of risk that the primary insurer passes on to a reinsurer. The primary insurance companies share the rest of the risk.

How does the coinsurance policy help an insurance company? up-arrow

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? up-arrow

The phrase ‘line size’ refers to the proportion of total risk that a particular insurance company takes. Since the shares of risk are not the same for the primary and secondary insurance company, the line sizes also are different for those two insurers.

What are the different types of reinsurance policy? up-arrow