DEFINITION of 'Co-insurance Effect'

A theory on corporate debt that posits that the likelihood of default decreases when two firms' assets and liabilities are combined through a merger or acquisition compared to the likelihood of default in the individual companies. The co-insurance effect relates to the concept of diversification, as risky debt is spread across the new firm's operations.

BREAKING DOWN 'Co-insurance Effect'

If the co-insurance effect is true, firms that merge may experience financial synergies through combining operations. Furthermore, the combined debt should be safer than before, which should reduce the yield investors demand from the corporation's bonds. This can reduce the cost of issuing new debt for the company, making it cheaper to raise additional funds.

RELATED TERMS
  1. Coinsurer

    One of the parties that provides additional insurance to the ...
  2. Coinsurance Formula

    The homeowners insurance formula that determines the amount of ...
  3. Default Probability

    The degree of likelihood that the borrower of a loan or debt ...
  4. Waiver Of Coinsurance Clause

    Language in an insurance policy that says the insurance company ...
  5. Co-Insurance

    A co-sharing agreement between the insured and the insurer under ...
  6. Temporary Default

    A bond rating that suggests the issuer might not make all of ...
Related Articles
  1. Insurance

    Understanding Co-Insurance

    Co-insurance is a cost-sharing agreement between an insurer and an insured party.
  2. Retirement

    Medicare Part D Is Changing How You Pay for Drugs

    As the price of prescription medication rises and the population ages, insurers are looking for ways to cut costs. That's where coinsurance comes in.
  3. Insurance

    Co-insurance vs. Co-pay: The Difference Matters

    When looking at co-insurance vs. co-pay healthcare policies, understanding the difference could save you a bundle on medical and dental expenses.
  4. Taxes

    Understanding Default Risk

    Default risk is the chance that companies or individuals will be unable to pay their debts.
  5. Insights

    Why and When Do Countries Default?

    Countries can default on their debt. This happens when the government is either unable or unwilling to make good on its fiscal promises.
  6. Insights

    How Countries Deal With Debt

    For many emerging economies, issuing sovereign debt is the only way to raise funds, but things can go sour quickly.
  7. Insurance

    Getting The Most From Your Health Insurance Policy

    Don't get stuck with high out-of-pocket costs. Read on to see how you can save your money.
  8. Insights

    The National Debt Explained

    We know it's growing, but we don't know exactly how. An in-depth look why the U.S. Government's debt continues to balloon and what it all means for you.
RELATED FAQS
  1. In what types of financial situations would credit spread risk be applied instead ...

    Find out when credit risk is realized as spread risk and when it is realized as default risk, and learn why market participants ... Read Answer >>
  2. What factors are taken into account to quantify credit risk?

    Learn how probability of default, or PD; loss given default, or LGD; and exposure at default, or EAD, are used to help quantify ... Read Answer >>
  3. What is the difference between a merger and a takeover?

    In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously ... Read Answer >>
  4. Why would you look at a company's net debt rather than its gross debt?

    Learn the difference between net debt and gross debt, how to calculate debt using a company's financial statements and why ... Read Answer >>
  5. In what way is credit risk analysis beneficial when trading in the stock market?

    Learn how value investors use credit risk analysis in their determination of which investments to make, and understand how ... Read Answer >>
  6. When should a business avoid debt financing?

    Read about the optimal use of debt in a business capital structure and how to know when a business should avoid further debt ... Read Answer >>
Hot Definitions
  1. Contango

    A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Acid-Test Ratio

    A stringent indicator that indicates whether a firm has sufficient short-term assets to cover its immediate liabilities. ...
  4. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that ...
  5. Taxes

    An involuntary fee levied on corporations or individuals that is enforced by a level of government in order to finance government ...
  6. Impaired Asset

    A company's asset that is worth less on the market than the value listed on the company's balance sheet. This will result ...
Trading Center