Co-pay

A co-pay is the insured's percentage share of the claim. The workbook defines it as the proportion of the claim amount that will be met by the insured person, used in the context of car insurance and health insurance.

Its purpose is behavioural, and the workbook says so: co-pay exists to make the insured person sensitive to the claim amount, since she will be bearing a part of the eventual bill. It also lets her lower the premium for the same degree of coverage — the higher the co-pay, the lower the premium.

The workbook is equally honest about why it is unpopular in practice: the insured has very little control over what the hospitals or garages charge for their services, so the sensitivity the co-pay is meant to create has nothing much to bite on.

The arithmetic. Co-pay is a percentage of the claim, not a rupee amount. If the insured has agreed to a co-pay of 15% and the ascertained claim is Rs 2,00,000, she pays Rs 30,000 and the insurer pays Rs 1,70,000.

Co-pay versus deductible. They are often confused and they behave differently:

The order matters. Where both apply, the workbook applies the deductible first and the co-pay to the balance. Its own illustration: Policy 1 has a deductible of Rs 1,000 and a co-pay of 10%; Policy 2 has a deductible of Rs 5,000 and no co-pay; the ascertained claim is Rs 40,000.

Policy 1:  40,000 - 1,000 = 39,000;  less co-pay 10% of 39,000 = 3,900
           Insurer pays Rs 35,100

Policy 2:  40,000 - 5,000 = 35,000
           Insurer pays Rs 35,000

Two very differently structured policies producing almost the same answer on this particular claim — and diverging sharply on any other claim size.

The workbook's Chapter 20 case study, Question 7. Giri has suffered damage to his insured property and claims Rs 50,000. The policy has a co-pay of 5% and a deductible of Rs 10,000.

Claim amount            (A)              Rs 50,000
Deductible              (B)              Rs 10,000
Co-pay 5% of (50,000 - 10,000)  (C)      Rs  2,000
Reimbursement           (A - B - C)      Rs 38,000

Note what the 5% is applied to: Rs 40,000, not Rs 50,000. Applying it to the gross claim gives Rs 2,500 and a reimbursement of Rs 37,500 — which is offered as a distractor in the paper.

Now scale the claim and watch the two devices diverge. Same policy, three different hospital bills:

The deductible's bite falls away as the bill grows — Rs 10,000 out of Rs 10 lakh is nothing. The co-pay never falls away: at Rs 10 lakh it is still taking Rs 49,500. That is the difference an adviser has to explain, because a 20% co-pay on a Rs 25 lakh cancer claim is Rs 5 lakh the client has to find.

Chapter 1 (Basics of Insurance), section 1.4(e), defines it and 1.4(f) sets it against the deductible with the Policy 1 versus Policy 2 illustration; Chapter 20, Question 7, is the computation. Expect the three-line A − B − C computation and, in a conceptual question, the reason co-pay exists — to make the insured sensitive to the claim amount and to lower the premium.

• Apply the deductible first, then the co-pay on the balance. The workbook does it in that order; applying the percentage to the gross claim is the commonest wrong answer.
• Co-pay is a percentage; deductible is an amount. They are not two names for the same thing.
• Higher co-pay means lower premium, not better cover.
• Co-pay does not fall away on large claims. It scales with the bill, which is why it hurts most on the claims that matter.
• The insured has little control over the bill, so the "sensitivity" rationale is weaker in practice than in theory — the workbook makes this criticism itself.
• Co-pay applies to indemnity policies. A defined benefit policy pays a pre-fixed sum without reference to actual loss.
• Read whether the question says co-pay, deductible, or both. Many policies have only one.