A medical expense policy pays 80% of covered charges after the deductible, with the insured responsible for the remaining 20%. The 20% coinsurance represents which risk management technique?

Why A is correct

Coinsurance is a form of risk sharing: the insurer and the insured divide each covered loss according to a stated percentage. By leaving part of the loss with the insured, the insurer reduces the moral hazard of over-utilization and keeps premiums lower, while still indemnifying the bulk of the loss. This is fundamentally different from avoidance (eliminating the exposure), pure transfer (the insurer bearing everything), or loss reduction (lowering the chance or severity of losses).

Why the other options are wrong

• B) Avoidance eliminates the exposure, for example by not engaging in the risky activity; coinsurance does not eliminate anything.
• C) Transfer would place the entire loss on the insurer; with coinsurance the insured still bears 20% of each covered loss.
• D) Coinsurance changes who pays, not how often losses occur; reducing the frequency of loss is loss prevention.

Memory hook

80/20 splits the bill, not the risk alone. Sharing keeps the insured honest and the premium down.