Excess of Loss Reinsurance
Excess of Loss Reinsurance is a type of non-proportional reinsurance that aims to protect insurers against large claims. The primary insurer is responsible for covering all claims up to a predetermined limit, known as the ‘retention’ or ‘priority’. Any claims that exceed this amount are covered by the reinsurance company.
Key Components
- Retention Limit: The maximum amount that the original insurer agrees to pay before the reinsurance takes effect.
- Cover Above Retention: Once the claims surpass the retention limit, the reinsurance company pays the excess amount, up to the agreed limits.
Purpose and Benefits
- Stabilizes Loss Ratios: Helps insurers maintain stability in their finances by covering large, unpredictable losses.
- Cap on Liability: Assists insurers in managing their risk exposure by setting a limit on the maximum potential loss.
- Improves Capital Management: Allows insurers to underwrite more policies with less capital, thus leveraging their risk.
Common Scenarios
- Catastrophic Events: Effective in situations where high-impact losses can occur, e.g., natural disasters.
Guidelines and Regulations
Various agencies and laws govern reinsurance practices to protect all involved parties. Insurers and reinsurance companies must navigate through these to ensure compliance:
- Reinsurance Laws and Regulations:
- The Insurance Act 2015 - UK provides a framework within which insurances and reinsurance operations are conducted in the UK.
- The U.S. Insurance Regulations oversee reinsurance in different states and set general expectations.
For further information on guidelines and handling excess of loss reinsurance, the National Association of Insurance Commissioners (NAIC) provides valuable resources and regulatory frameworks.
