Question

Discuss the meaning of deductible and coinsurance in the context of insurance. What are the similarities and differences between the two? How do deductibles and coinsurance mitigate the losses of insurers?

Madam Yong Hon Heng owns a factory building valued at RM1.8 million, and she insures the property under four insurers at RM300,000 (insurer A), RM400,000 (insurer B), RM500,000 (insurer C) and RM600,000 (insurer D). Assume that each insurer includes a pro-rata liability clause in their policy. In the event that, a RM500,000 loss occurs, how will Madam Yong Hon Heng be able to claim from each insurer?

Answer 1

Deductible-It is the amount that is paid by a person for his health insurance before the insurance company begins to payback.

Coinsurance-The percentage of the total medical cost a person pays, after deductible.

Differences:

Deductible	Coinsurance
Amount to be paid before health insurance comes in	Amount paid after health insurance comes in
The entire amount paid by the person	A percentahe of the total mdical cost which is borned by the person
Can be claimed for tax benefit	Cannot be claimed for tax benefit

Similarities:

Deductible	Coinsurance
Paid by the person and not the insurance complany	Paid by the person and not the insurance complany
Needed for Health Insurance	Needed for Health Insurance

In both Coinsurance and Deductible, a part of the total cost is borne by the person. Until deductible is paid, health insuarnce does not kick in. The maximum is mostly covered with the deductible part. Even after insurance covers the medical costs of a person, the coinsurance feature ensures a certain part is paid by the person.Hence it mitigates a lot of financial loss of the insurer.

In case of Madam Yong Hon Heng, the loss of RM500,000, is to be borne by all the 4 insurers-A,B,C and D in a pro-rata basis. Hence the cost borne by each is as follows-

A-83,333

B-1,11,111

C-1,38,889

D-1,66,667