insurance

Excess of Loss Reinsurance

A type of reinsurance where the reinsurer covers losses above a specified dollar amount (called the attachment point) up to a maximum limit. The primary insurer retains losses below the attachment point and pays a premium to transfer the excess risk.

Example

“The regional insurance company purchased excess of loss reinsurance with a $10 million attachment point to protect against catastrophic hurricane losses.”

Memory Tip

Think 'Extra Coverage for Extra Large Losses' - reinsurers cover the extra-large losses above the attachment point.

Why It Matters

Excess of loss reinsurance allows smaller insurance companies to write larger policies and survive catastrophic events by transferring major loss exposure to reinsurers. This system helps maintain insurance market stability and ensures coverage remains available to consumers even after major disasters.

Common Misconception

People often think reinsurance directly affects policyholders or that they can make claims against reinsurers, but reinsurance is strictly a business arrangement between insurance companies. Policyholders have no direct relationship with reinsurers and must still look to their original insurer for all claim payments and policy services.

In Practice

ABC Insurance Company has excess of loss reinsurance with a $5 million attachment point and $20 million limit. When Hurricane Maria causes $18 million in covered losses to their policyholders, ABC pays the first $5 million from their own funds. Their reinsurer then pays $13 million (the amount between $5 million and $18 million), while ABC retains responsibility for paying all claims to their policyholders and handling all claim services directly.

Etymology

The term evolved from reinsurance practices in the late 19th and early 20th centuries, combining excess coverage concepts with loss-sharing arrangements between insurers.

Common Misspellings

excess of lost reinsuranceexess of loss reinsuranceexcess of loss reinsuranseexcess of loss reinsurence

Related Terms

reinsurance Working Layer

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