excessofloss

Excess of loss is a form of non-proportional reinsurance in which the reinsurer covers losses that exceed the ceding insurer’s retention (attachment point) up to a defined limit. It is designed to protect the insurer from high-severity losses rather than sharing premiums and losses across all policies.

In operation, the ceding company retains losses up to the attachment point. When losses exceed this point, the reinsurer pays the amount above the retention, up to the contract’s limit. The structure is defined by the type of excess of loss contract and the attachment point and limit. Common structures include per risk excess of loss (covering losses on a single risk or policy), per occurrence or per event excess of loss (covering all losses arising from one event, such as a hurricane), and aggregate or catastrophe excess of loss (covering losses that exceed a cumulative threshold over a period). Each type has specific implications for how losses are measured and settled.

Purposefully used to stabilize the insurer’s results and preserve solvency, excess of loss reinsurance helps increase underwriting capacity and protect against sudden, severe losses. Unlike proportional reinsurance, it does not involve sharing of premiums or losses on a pro rata basis; protection is triggered only when the loss exceeds the retention. It is common in property and casualty lines and for large or catastrophic risks.