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Chapter I1 Co-insurance

The term co-insurance is used in two distinct ways by those in the insurance market. The first of these
An insurer may
choose to share a risk relates to risk sharing between insurers; the second we will consider in section I1A. For property
by means of co- insurance in particular, an insurer may choose to share a risk by means of co-insurance. This involves an
insurance
insurer agreeing with other insurers the rating and terms to be applied and issuing a collective policy.
Each insurer receives a stated proportion of the premium and pays the same proportion of any losses
that occur. The leading office is the first named insurer in the policy and invariably carries the largest
share of the risk, and they are also responsible for issuing the documentation. Each time a change is
required the leading office issues closing instructions to each of the co-insurers advising them of the
proposed change and requesting their agreement.
Although the leading office carries out these functions on behalf of the other insurers, each insurer is
separately liable to the policyholder for their proportion of any claim that becomes payable. The
policyholder has a direct contractual relationship with each individual co-insurer as if each had issued a
policy for its own share.
In the event of a claim, the leading office will settle losses, within agreed defined limits, on behalf of the
co-insurers and recoup the sums from them afterwards although for substantial losses, say in excess of
US$150,000, a payment is made to the policyholder by each co-insurer and sent to the leading office for
onward transmission to them.
The system is administratively cumbersome, but has the benefit of being entirely transparent as far as
the policyholder is concerned.

I1A Risk sharing with the policyholder
The term ‘co-insurance’ is also used in relation to the amount of a risk that the policyholder may retain.
A small fixed sum retained by the insured is called an ‘excess’; a large fixed sum tends to be called a
‘deductible’. However, where a policyholder is responsible for a substantial proportion of each loss,
either through choice (in order to reduce premiums) or by necessity (as part of an insurer’s terms for
accepting the risk), the term co-insurance is used. An amount might be expressed as ‘Co-insurance
25%’, which would mean that the policyholder would pay 25% of each claim under the policy.
One benefit for insurers of risk sharing is that the policyholder is deterred from making small claims.
They may also take more care to prevent damage or loss occurring if they are likely to be financially
impacted.

J Dual insurance

Essentially, this term is used when there are two or more policies in force which cover the same risk. The
policyholder may have done this accidentally; for example, they may have bought a travel policy for their
holiday that includes cover for personal effects that are already covered under the ‘all risks’ section of
their household contents policy.
There are, however, occasions when dual insurance is deliberate. Take, as an example, goods that are
stored in a warehouse; the owner may have a policy covering all the goods that they own, regardless of
where they are kept. The warehouse keeper may have a policy covering goods that are in their custody or
control. We can see straight away that each is a legitimate insurance. However, there is no exact
duplication, although the goods appear to be covered twice. Special rules apply to such situations, and
in chapter 8 we will look more closely at what happens when there are two or more policies covering the
same risk.

K Self-insurance

The term self-insurance means that an individual or company has decided not to use insurance as the
risk transfer mechanism, but to carry the risk themselves; for example, a company that has a number of
shops and a predictable pattern of small claims for glass breakages sets aside a regular sum each
month to fund these losses.
The term can also be used when referring to the part of a loss that is retained, although in this context it
usually applies to substantial sums. For example, a manufacturing company takes a decision to self-
insure the first US$50,000 of each property loss that it suffers. The amount is called the retention.