Final answer:
Coinsurance is when an insurance policyholder pays a set percentage of a loss, with the insurance company paying the rest, aiming to reduce moral hazard and prevent riskier behavior by the insured. It's a common feature in insurance policies alongside deductibles and copayments.
Step-by-step explanation:
The term you're referring to is coinsurance, which is a kind of cost sharing between the insurance policyholder and the insurance company. When a policyholder has a coinsurance clause in their policy, they are required to pay a certain percentage of the loss, while the insurance company pays the remaining amount. For example, if a house is insured with an 80/20 coinsurance clause and sustains damages that cost $10,000 to repair, the policyholder would pay $2,000 (20%) and the insurance company would cover the remaining $8,000 (80%).
Coinsurance is a method employed to reduce moral hazard, which occurs when the presence of insurance changes the behavior of the insured, potentially leading to more risk-taking. Other methods to combat moral hazard include deductibles and copayments. Deductibles require the insured to pay a specific amount before coverage kicks in, while copayments are a fixed amount paid for a specific service, like a doctor's visit, with the insurer covering the rest.