Final answer:
Coinsurance is the sharing of insurance costs between the policyholder and the insurance company. It is a common feature in various types of insurance policies and serves to prevent overutilization .
Step-by-step explanation:
The concept in question refers to coinsurance, which is a common provision in various insurance policies whereby the policyholder and the insurance company share the cost of insured losses in a predetermined ratio. For example, in a health insurance policy, if the coinsurance rate is set at 20% for a given medical service, then the insured individual would pay 20% of the costs while the insurance company would pay the remaining 80%.
The process of setting aside a budget in advance to cover the estimated cost of such potential losses is a prudent financial practice and aligns with risk management strategies. The purpose of coinsurance is to prevent overutilization of insurance benefits by ensuring that the policyholder shares in the financial responsibility of losses, typically leading to more mindful consumption of insured services.Additionally, coinsurance is also relevant to property and casualty insurance policies.
For instance, after a deductible is met, the insured may be responsible for a certain percentage of the loss, with the insurance company covering the rest, up to policy limits. This system incentivizes policyholders to take preventative measures to protect their property, as it directly impacts their potential out-of-pocket expenses in the event of a loss.