What is coinsurance and reinsurance?

Answer

Coinsurance- When two or more entities take a combined Insurance cover, it is called the Coinsurance.

Example: Ship insured for USD 100 million:

• Insurer A: 40%
• Insurer B: 35%
• Insurer C: 25%

If there is a covered loss of USD 20 million, each insurer pays its agreed proportion.

Reinsurance- When the Insurer himself purchases a policy to cover his risks, that is called reinsurance. 

An insurer transfers part of the risk it has accepted to another insurer, called the reinsurer.

Example:

• Shipowner insures vessel with Insurer A for USD 100 million.
• Insurer A keeps USD 20 million risk.
• Insurer A reinsures USD 80 million with one or more reinsurers.

If a loss occurs, the shipowner claims against Insurer A, not normally against the reinsurer. Insurer A then obtains reimbursement under its reinsurance contract.

It allows insurers and P&I Clubs to:

• accept very large marine risks,
• protect their financial capacity,
• spread catastrophic losses,
• stabilize claims experience,
• provide very high limits of cover.

For example, International Group P&I Clubs use pooling and collective reinsurance arrangements for very large claims.