Excess of Loss Reinsurance

Excess of loss reinsurance is a type of reinsurance that provides coverage for losses that exceed a certain amount. The primary insurer retains the first layer of risk, and the reinsurer assumes the risk for losses that exceed the retention limit. Excess of loss reinsurance can be used to protect against catastrophic losses, such as hurricanes or earthquakes.

There are two main types of excess of loss reinsurance: proportional and non-proportional. Proportional reinsurance is based on a percentage of the primary insurer's losses. For example, if the primary insurer has a retention limit of $1 million and the reinsurer agrees to provide a 50% excess of loss reinsurance, the reinsurer will pay for 50% of any losses that exceed $1 million. Non-proportional reinsurance is based on a fixed dollar amount. For example, if the primary insurer has a retention limit of $1 million and the reinsurer agrees to provide a $5 million excess of loss reinsurance, the reinsurer will pay for any losses that exceed $1 million up to a maximum of $5 million.

Excess of loss reinsurance can be a valuable tool for primary insurers to manage their risk exposure. By transferring some of the risk to a reinsurer, primary insurers can reduce their capital requirements and improve their financial stability. Excess of loss reinsurance can also help primary insurers to maintain their underwriting profitability.

There are a number of factors that primary insurers should consider when purchasing excess of loss reinsurance, including the retention limit, the type of reinsurance (proportional or non-proportional), the premium, and the terms and conditions of the reinsurance contract. It is important to work with a knowledgeable broker to find the right excess of loss reinsurance program for your needs.

Excess of loss reinsurance is a complex topic, and there are a number of other factors that primary insurers should consider when purchasing this type of reinsurance. If you are a primary insurer and you are considering purchasing excess of loss reinsurance, it is important to speak with a knowledgeable broker to get the advice you need.