3.1 Co-insurance, Dual Insurance and Self-insurance

Insurance is normally placed with a single insurer under a single policy. For large or complex risks, however, the ordinary one-insurer/one-policy model is often varied. This section covers three variations that IF1 candidates must be able to distinguish: co-insurance, dual insurance and self-insurance. They are easy to confuse, so the section contrasts them directly.

Co-insurance

Co-insurance is an arrangement in which a single risk is shared by several insurers in agreed proportions from inception. Each insurer signs the same policy (or a single policy is issued on behalf of all of them) and each insurer is liable only for its agreed share of any loss.

• Common for large commercial risks — a £50m factory is too big for one insurer to hold alone, so a panel of insurers each takes a slice.
• The split is agreed at the outset and shown on the policy schedule, e.g. Insurer A 50%, Insurer B 30%, Insurer C 20%.
• Each insurer pays only its share. If a £10m loss occurs, A pays £5m, B pays £3m, C pays £2m. The insured does not have to claim the whole loss from one insurer and then chase the others.
• One insurer often acts as the leading underwriter, setting the terms and premium, with the other insurers following those terms ("following underwriters").

Co-insurance is sometimes confused with the "average" (underinsurance) clause found in some policies, which also uses the word "coinsurance" in the United States. In UK insurance, co-insurance means risk-sharing between insurers, not a policy condition about underinsurance.

Dual Insurance

Dual insurance arises when two or more independent policies cover the same subject matter, the same insured interest and the same risk. The policies are separate contracts, taken out (usually) at different times, possibly with different insurers.

• Example: a householder has a contents policy with Insurer A and, after moving jewellery into the house, takes out a separate valuables policy with Insurer B covering the same items against theft.
• This is not co-insurance — the insurers did not agree from inception to share one risk in set proportions. They issued independent contracts.
• The problem is over-insurance: the insured could, in theory, claim the full loss from each policy and recover twice. The principle of indemnity forbids that.

The contribution principle

To prevent over-insurance, the contribution principle allows an insurer who has paid a loss in full to recover a proportion from the other insurer(s) who also cover the same risk. The insured is made whole, not better than whole.

The most common method is rateable proportion — each insurer contributes in proportion to its sum insured.

Worked contribution example

A factory insures its stock with two separate policies:

• Policy A: sum insured £100,000
• Policy B: sum insured £50,000

A fire causes £30,000 of damage. Both policies cover fire on the same stock.

Rateable proportion:

• Policy A pays: £100,000 / £150,000 × £30,000 = £20,000
• Policy B pays: £50,000 / £150,000 × £30,000 = £10,000

Total paid to the insured: £30,000 — the full loss, no more. The insured may claim the full £30,000 from either insurer; that insurer then recovers the other's share internally under contribution.

Co-insurance vs dual insurance — the key distinction

Self-insurance

Self-insurance is the deliberate retention of risk by an organisation rather than transferring it to an insurer. The organisation sets aside funds (a self-insurance fund or reserve) to meet losses that arise.

• Used by large organisations with enough predictable exposure to model their own losses — a fleet operator with 5,000 vehicles may self-insure its motor fleet, paying accident costs from its own funds.
• It allows the organisation to avoid paying the insurer's expense loadings and profit margin on predictable losses, while still protecting against catastrophe through reinsurance or a stop-loss policy.
• A captive is a special form of self-insurance: a wholly-owned insurance subsidiary set up by a parent company to write its parent's risks. The captive is a real insurer (often domiciled offshore, e.g. Bermuda or Guernsey) and may reinsure into the wider market.

Risk retention vs risk transfer

Self-insurance sits on the retention side of the risk-management choice between retention and transfer:

A firm with a £1m commercial property policy carrying a £25,000 deductible is retaining the first £25,000 of each loss and transferring the rest. Self-insurance is simply the extreme case where the "deductible" is the whole loss, up to the fund the firm has set aside.

Common Exam Traps

• "Two policies on the same risk = co-insurance." It is dual insurance. Co-insurance requires a single shared arrangement with proportions fixed from inception.
• "Each co-insurer is jointly liable for the full loss." No — each co-insurer is liable only for its agreed proportion.
• "Self-insurance means having no cover at all." It means retaining the risk and funding it yourself; captives and stop-loss arrangements often sit behind the headline self-insurance.

Key Takeaways

• Co-insurance = one risk shared by several insurers in agreed proportions from inception; each pays only its share.
• Dual insurance = two or more independent policies on the same subject, interest and risk; contribution prevents over-insurance.
• Contribution by rateable proportion splits a loss between insurers in proportion to their sums insured.
• Self-insurance = retaining risk and funding losses internally; a captive is a wholly-owned insurance subsidiary.
• Retention suits predictable, affordable losses; transfer suits large or unpredictable ones; a deductible is partial retention.