Coinsurance

[dballs33]

I'm having a little trouble working coinsurance problems. If your coinsurance clause is 80% and assuming the face value of the policy meets the coinsurance req., does the insurer pay the full value of each loss up to 80% of total value of home? Or is it do they pay 80% of the losses and you pay 20%?

The TIA guide and problems say it would pay the full value of loss until losses exceed 80% of total value of home.

Instead, in this article (if i'm interpreting it right) it's saying coinsurance is proportionally shared.

""""In insurance policies for fire or water damage the coinsurance clause provides that property must be insured for a specific percentage, usually 80 percent of its actual cash value. The 80 percent provision is known as the New York Standard Coinsurance Clause. The owner of the property is liable for the remaining 20 percent of its actual cash value. If the insured party's property is only partially damaged, that person's recovery under the policy will be reduced in proportion to the amount of loss suffered.

For example, a homeowner has a $120,000 fire insurance policy on her home, which is valued at $150,000. The woman's coverage is 80 percent of the home's actual cash value. If her house is completely destroyed by a fire that is not Arson, she will recover $120,000, which is the full face amount of the policy. She is responsible for the remaining 20 percent of its actual cash value, or $30,000. If a fire caused only $20,000 worth of damages, the homeowner could recover only $16,000, or 80 percent of the loss. The homeowner is a coinsurer for the remaining $4,000, or 20 percent of the replacement cost of the property.""""""""

How TIA would put it in that example, that $20K loss would be covered by the insurer fully.

Help please :)!

[Vorian Atreides]

Let's assume that a non-commercial property insurer has an 80% coinsurance requirement. What this means is that so long as an insured's face value on the insurance policy is at least 80% of the replacement cost of the home, the insurer will pay all losses upto the policy limits w/o any coinsurance penalty to the insured.

Consider the following situation:

Home's replacement cost is $625,000. The insured, due to mortgage requirements, has a $1,000 deductible.

So, the coinsurance requirement would be $625k * 80% = $500k.



Scenario #1: Let's suppose that the insured suffers a $426k loss.

If the insured has policy limits of $550k, then the insurer will pay $426k - 1k deductible = $425k.

If the insured has policy limits of $400k, then there will be a coinsurance penalty. The insurer will pay (426k - 1k)*(400/500) = 340k. The insured will have to pay the 1k deductible plus the 85k coinsurance penalty.



Scenario #2: Let's suppose that the insured suffers a $576k loss.

If the insured has policy limits of $550k, then the insurer will pay the smaller of $576k less the $1k deductible ($575k) or the policy limits ($550k). In this case, it'll be $550k.

If the insured has policy limits of $400k, then there will be a coinsurance penalty. The insurer will pay the smaller of ($576k less the 1k deductible) * (400k / 500k) (= $460k) or the policy limits ($400k). So here, it'll be $400k.

[dballs33]

thank you! so it sounds like my source article i quoted is mistaken that it's proportional from the first dollar of loss.

[Vorian Atreides]

thank you! so it sounds like my source article i quoted is mistaken that it's proportional from the first dollar of loss in excess of the deductible.
IFYP for the case with property insurance and the current syllabus. (At least I don't think W&M discuss anything else directly about coinsurance.)



There is another aspect of "coinsurance" that can be applied with either healthcare management or a reinsurance treaty that was on the syllabus for the 2006 Exam.

The situation being structured such that the insured will retain the first $x then pay a portion of the next layer of claims (say a 20% coinsurance where the insured pays 20% of any "additional" claims above $x of total claims) upto a certain maximum payment by the insured. After this point, the insurance company would pay 100% of any claims in excess of this point.