Coinsurance Ratio Definitions

& Exmaples


Coinsurance ratio is a common phrase that is used by insurance professionals in the health insurance and property insurance businesses. While the sounds and spells the same, different meanings are attributed to the phrase in the personal and commercial property businesses and the health insurance business.

Coinsurance Ratio in Property Insurance

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Coinsurance ratio in property insurance is a phrase used to describe the ratio at  which property has to be insured, compared to replacement cost, in order for the insurance company to pay the claim in full and without any penalties. Insurance carriers devised the coinsurance ratio to discourage customers from underinsuring their property, hence paying lower premiums. If a customer maintains a policy with coverage amount less than the coinsurance amount, the insurer may pay less than the actual loss.

Examples of Coinsurance Penalty



A car dealer insurance policy may have been issued with dealer physical damage coverage of $500,000, deductible of $1,000; and a coinsurance ratio of 80%. If an insured vehicle is destroyed by fire with a value of $25,000 then the car dealer insurance carrier will request an inventory list of the auto dealer vehicles. If the car dealer was determined to have $950,000 in inventory, then below would be the calculation for the claim:

  1. Amount of coverage that must be maintained to be fully covered:  950,000 X 80% = $760,000. This amount is well above the existing limit the customer has ($500,000), so a coinsurance penalty is inevitable.
  2. In the above case the customer was about 66% insured. The policy was issued at only $500,000 when the client was supposed to carry a minimum of $760,000 to be fully covered (760,000/500,000).
  3. Since the client maintained only 66% of what was supposed to be carried, then the insurer will pay the same ratio, or 66% of the loss. In that case, the amount of the claim will be 66% X 25,000 or $16,500. Considering a deductible of $1,000 the insurer will minus the deductible and pay only $15,500!

Coinsurance Ratio in Major Medical Health Insurance



Coinsurance ratio in Major Medical Health Insurance is referred to as co-sharing. The health insurance customer agrees to share with the insurance company a specified amount, a percentage of a specific dollar amount (ie, first $5,000 or $10,000 of the bills), after the deductible is met and paid by the client. This percentage is referred to as coinsurance ratio. There is always a maximum amount that the customer will pay as a result of implementing the coinsurance ratio, referred to as out-of pocket maximum. After that maximum, the health insurer will pay 100% of the qualified bills.

Examples of Coinsurance Ratio in Major Medical Health Insurance

Assume that we have a client with a major medical policy with a deductible of $500 and a coinsurance ratio of 90%, and out of pocket maximum of $2,000. The following scenarios will explain the applications of coinsurance ratio:
Chicago auto insurance1.    Client receives a covered health insurance bill in the amount of $3,000. In this case, the client must pay first the deductible of $500, leaving him / her with bills of $2,500. The insurer will pay 90% of the remaining bill of $2,500, and client will pay 10% (or $250). In this example the client will end up paying the deductible ($500) plus  the coinsurance ($250), totaling $750, leaving the company with $2,250 to pay.
2.    Customer gets a covered health insurance bill totaling $10,000. In this case, the client must pay first the deductible of $500, leaving him / her with the remainder of the bills of $9,500. The insurance company will pay 90% of the that bill of $9,500, and client will pay 10% ($950). For that the client will end up paying the deductible ($500) besides the coinsurance amount of ($900), totaling $1,450, leaving the company with $8,550.
3.    The insured customer receives a qualified health insurance bill in the amount of $30,000. In that case, the client must pay first the deductible of $500, leaving him / her with bills of $29,500. The insurer will pay 90% of the remaining bill of $29,500, and client is supposedly required to pay 10% ($2950). But because there is an out of pocket expense maximum of $2,000 the client will pay only the deductible of $500 plus the maximum coinsurance of $2,000, totaling $2,500, and leaving the health insurance carrier with the remaining balance of $27,500.
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