Understanding Coinsurers: Key Roles and Functions in Insurance

What Is a Coinsurer?

A coinsurer is a company that shares with another company some of the potential liability for covering a single policyholder. The arrangement is most common when the risk or risks covered could be too costly for a single insurance company to manage. Generally, a primary insurance company covers most of the cost of a major claim while a coinsurer takes responsibility for the rest. Seven coinsurers handled the claims relating to the World Trade Center attack in 2001.

Reinsurance companies differs from coinsurers in that they share the excess costs of an unexpected flurry of claims that strain the resources of a primary insurer.

How Coinsurers Share Insurance Risks

Coinsurers share in any claim or loss in proportion to the amount of risk that they take on.

They are most often used for policies covering large businesses and governments that could suffer a loss that is beyond the resources of any individual insurance company. After the attack on New York City's World Trade Center in 2001, seven insurers ultimately paid more than $4 billion in property damage claims. 

The policyholder receives a separate contract from each coinsurer. To reduce the paperwork burden, the insurance company that undertakes the largest proportion of the claim serves as the leading insurer.

Situations Requiring Coinsurers

Some types of policies, like industrial fire insurance, typically involve coinsurance because of the high dollar cost of the risks the policy covers.

State or federal laws dictate that some risks must be jointly insured by several coinsurers in order to adequately diversify the risk of a large claim.

Insurance companies share risks in various ways, sometimes passing part of the risk to a reinsurance company. Reinsurance, also known as insurance for insurers or stop-loss insurance, is a transferral of a portion of responsibility to another party. The reinsurer accepts responsibility for claims above a certain level in return for a share of the premium paid by the policyholder.

Comparing Coinsurance and Reinsurance

Reinsurance typically covers an insurance company against an unexpected accumulation of individual claims that would otherwise endanger its solvency.

A coinsurer is one of two or more insurance companies that agrees to share direct responsibility for the payment of claims from a policyholder. A reinsurer agrees to reimburse an insurance company for losses above an anticipated level.

Both practices allow insurers to underwrite policies for a larger number of clients without imperiling their financial stability. Just as a homeowner needs insurance to rebuild after a fire, an insurance company needs coinsurers and reinsurers to cover the costs of too many devastating fires breaking out at the same time.

The Bottom Line

A coinsurer is an insurance company that shares the liability of large claims, especially when a single insurer is unable to cover the cost alone. Coinsurers are often involved in policies covering high-risk entities like large businesses and governments. State or federal laws mandate joint insurance by several coinsurers for certain risks. While both coinsurance and reinsurance diversify risk, reinsurance specifically protects insurers from a surge of unexpectedly high claims.