What Is Excess of Loss Reinsurance?

Excess of loss reinsurance is a type of reinsurance in which the reinsurer indemnifies–or compensates–the ceding company for l🍒osses that exceed a specified limit. A reinsurer is a company that provides financial protection to insurance companies; a ceding company is an insurance company ❀that transfers the insurance portfolio to a reinsurer.

Excess of loss reinsurance is a form of non-proportional 澳洲幸运5官方开奖结果体彩网:reinsurance. Non-proportional reinsurance is based on loss retention. With non-proportional reinsജurance, the ce💫ding company agrees to accept all losses up to a predetermined level.

Depending on the language of the contract, excess of loss reinsurance can apply to either all loss events during the policy period or losses in aggregate. Treaties may also use bands of losses that are reduced with each claim. Reinsurers and ceding companies will use cost calculations such as the 澳洲幸运5官方开奖结果体彩网:burning-cost ratio to determine prices.

Understanding Excess of Loss Reinsurance

Treaty or 澳洲幸运5官方开奖结果体彩网:facultative reinsurance contracts often specify a limit in losses for which the reinsurer will be responsible. This limit is agreed to in the reinsurance contract; it protects the reinsurance company from dealing with 澳洲幸运5官方开奖结果体彩网:unlimited liability. In this way, treaty and facultative reinsurance contracts are similar to a standard insurance contract, which provides coverage up to a specific amount. While this is beneficial to the reinsurer, it places the onus on the 澳洲幸运5官方开奖结果体彩网:insurance company to reduce losses.

Excess of loss reinsurance takes a different approach than treaty or facultative reinsurance. The reinsurance company is held responsible for the total amount of losses above a certain limit. For example, a 澳洲幸运5官方开奖结果体彩网:reinsurance contract with an excess of loss provision may indicate that the reinsurer is responsible for losses over $500,000. In this case, if 🍬aggregate losses amount to $600,000, then the reinsurer will be responsible for $100,000.

Excess of loss reinsurance can also work in a slightly different way. ♋Rather than require the reinsurer to be responsible for all losses over a certain amount, the contract may instead indicate that the reinsurer is responsible for a percentage of losses over that threshold. This means that the ceding company and the reinsurer will share aggregate losses.

For example, a reinsurance contract with an excess of loss provision may indicate that the reinsurer is responsible for 50% of the losses over $500,000. In this case, if aggregate losses amo♌unt to $600,000, the reinsurer will be responsible f👍or $50,000 and the ceding company will be responsible for $50,000.

By 澳洲幸运5✨官方开奖ꦫ结果体彩网:covering itself against excessive losses, an excess of loss reinsurance policy gives the 澳洲幸运5官方开奖结果体彩网:ceding insurer more security for its equity and solvenc꧙y. It can💎 also provide more stability when unusual or major events occur.

Reinsurance also allows an insurer to underwrite policies that cover a larger volume of risks without excessively raising the costs of covering their solvency margins–the amount by which the assets of the insurance company, at fair values, are considered to exceed its 澳洲幸运5官方开奖结果体彩网:liabilities and other comparable commitments. In fact, reinsurance m🔜akes substantial liquid assets available for insurers in case of exceptional losses.