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Co-insurance is a critical concept in insurance that serves to distribute risk between insurers and policyholders. When co-insurance is part of a policy, it indicates that both the insurer and the policyholder share the costs of a claim. This arrangement helps ensure that the policyholder has a vested interest in the property being insured, as they are responsible for a certain percentage of the costs, which can lead to more prudent management of the insured asset.

The structure of co-insurance also encourages policyholders to insure their property to a reasonable extent (usually a percentage of its value), fostering a more equitable risk-sharing system. If property values are underinsured, a co-insurance penalty could result in reduced claims payments, motivating policyholders to maintain adequate coverage levels.

Understanding co-insurance reinforces why this sharing of costs is beneficial for the insurance model. It mitigates the insurer's risk while incentivizing policyholders to be mindful of the value of their insured assets, ultimately maintaining a balanced relationship in the insurance market.