Excess of Loss Reinsurance

Excess of Loss Reinsurance: A Detailed Guide for U.S. Insurance Professionals

Excess of loss reinsurance is a critical risk management tool widely used by insurance companies in the United States to protect themselves from large, unexpected losses that exceed their financial capacity. This article offers an in-depth exploration of excess of loss reinsurance, explaining its structure, types, benefits, pricing, and practical applications, while naturally integrating key insurance terms and long-tail keywords relevant to American insurers, brokers, and risk managers.

What Is Excess of Loss Reinsurance?

Excess of loss reinsurance is a form of non-proportional reinsurance where the reinsurer indemnifies the ceding company for losses exceeding a specified retention or attachment point. Unlike proportional treaties where premiums and losses are shared in fixed percentages, excess of loss coverage kicks in only after losses surpass the insurer’s predetermined retention, protecting the insurer’s balance sheet from catastrophic or unusually large claims.

In practical terms, if a U.S. insurer has an excess of loss reinsurance contract with a retention of $1 million and suffers a loss of $3 million, the reinsurer will be responsible for the $2 million exceeding the retention, up to the limit defined in the contract.

Types of Excess of Loss Reinsurance

Per Risk Excess of Loss

This type protects the insurer against losses from individual risks exceeding a certain limit. For example, a commercial property insurer may purchase per risk excess of loss coverage to limit its exposure to any single building or asset loss above a set retention.

Per Occurrence (or Per Event) Excess of Loss

Also known as catastrophe excess of loss, this covers aggregate losses arising from a single event, such as a hurricane or earthquake, that affect multiple policies. It is vital for U.S. insurers exposed to natural disasters, helping them manage peak risk and maintain solvency.

 Aggregate Excess of Loss

This protects insurers from losses exceeding a threshold over a defined period (typically one year). It covers the accumulation of smaller losses that collectively threaten the insurer’s financial stability.

How Excess of Loss Reinsurance Works in the U.S. Market

U.S. insurers use excess of loss reinsurance to manage catastrophic exposure, reduce volatility, and meet regulatory capital requirements. The contract specifies:

• Retention (Attachment Point): The amount the insurer retains before coverage begins.
• Limit: The maximum amount the reinsurer will pay.
• Layers: Multiple excess of loss treaties can be stacked in layers, each covering a different loss band.

For example, a layered structure might include:

• First layer: $1 million retention, $5 million limit.
• Second layer: $6 million retention, $10 million limit.

Such layering allows insurers to customize protection according to risk appetite and capital availability.

Benefits of Excess of Loss Reinsurance

• Financial Protection: Shields insurers from large losses that could threaten solvency.
• Capital Efficiency: Frees up statutory capital, enabling insurers to write more business.
• Loss Volatility Reduction: Smooths earnings by capping losses at manageable levels.
• Regulatory Compliance: Helps insurers meet state solvency and risk-based capital standards.
• Flexibility: Can be tailored to specific lines of business, geographies, and risk profiles.

Pricing and Underwriting Considerations

Pricing excess of loss reinsurance involves actuarial analysis of historical loss data, exposure, and catastrophe models. Key factors include:

• Retention level: Higher retention typically lowers premium but increases insurer risk.
• Limit size: Larger limits increase reinsurer exposure and premium.
• Loss frequency and severity: Catastrophe modeling helps estimate probable maximum loss (PML).
• Burning cost: The ratio of losses paid to premiums earned, used to assess pricing adequacy.

Underwriting focuses on the cedent’s portfolio quality, risk management practices, and claims history. Reinsurers may require detailed exposure data and loss reports to evaluate risk accurately.

Practical Example

A U.S. property insurer with significant hurricane exposure purchases a per occurrence excess of loss reinsurance treaty with a $10 million retention and $50 million limit. When Hurricane Ian causes $40 million in insured losses, the insurer pays the first $10 million, and the reinsurer covers the remaining $30 million, protecting the insurer’s capital and enabling rapid claims payment.

Frequently Asked Questions (FAQs)

Q1: How does excess of loss reinsurance differ from quota share reinsurance?
A: Excess of loss is non-proportional, covering losses above a retention, while quota share is proportional, sharing premiums and losses at a fixed percentage.

Q2: Can excess of loss reinsurance cover multiple lines of business?
A: Yes, it can be structured to cover specific lines or aggregated portfolios depending on the insurer’s needs.

Q3: What is a “layer” in excess of loss reinsurance?
A: A layer is a band of coverage with defined retention and limit. Multiple layers can be combined to provide comprehensive protection.

Q4: How does excess of loss reinsurance help with regulatory capital?
A: By transferring large risks, it reduces the insurer’s required capital reserves under solvency regulations.

Q5: Is excess of loss reinsurance suitable for small insurers?
A: Yes, it can be tailored to any insurer’s risk profile and capital structure.

5 most active and largest reinsurance companies 

operating globally and significantly in the USA, with their key contact details for professional inquiries:

Munich Re (Munich Reinsurance Company)

Country: Germany
2022 Gross Premiums Written: ~$51.3 billion (global)
Overview: The world’s largest reinsurer, offering a full spectrum of reinsurance products including property & casualty, life & health, specialty lines, and risk solutions.
Headquarters:

• Address: Königinstraße 107, 80802 Munich, Germany
• Phone: +49 89 3891-0
• Website: www.munichre.com
  U.S. Office:
• Munich Re America
• Address: 555 College Road East, Princeton, NJ 08540, USA
• Phone: +1 609 243 4200

Swiss Reinsurance Company Ltd (Swiss Re)

Country: Switzerland
2022 Net Premiums Written: ~$22.9 billion
Overview: A global leader in reinsurance, Swiss Re provides property & casualty, life & health, and specialty reinsurance solutions, with strong emphasis on innovation and risk analytics.
Headquarters:

• Address: Mythenquai 50/60, 8002 Zurich, Switzerland
• Phone: +41 43 285 2121
• Website: www.swissre.com
  U.S. Office:
• Swiss Re America Holding Corporation
• Address: 175 King Street, Armonk, NY 10504, USA
• Phone: +1 914 828 8000

Berkshire Hathaway Reinsurance Group

Country: USA
2022 Net Premiums Written: ~$15.4 billion
Overview: Part of Berkshire Hathaway Inc., this group provides multi-line reinsurance including property, casualty, life, and specialty lines with a strong capital base and underwriting discipline.
Headquarters:

• Address: 3555 Farnam Street, Omaha, NE 68131, USA
• Phone: +1 402 346 1400
• Website: www.berkshirehathaway.com

Hannover Re

Country: Germany
2022 Net Premiums Written: ~$14.3 billion
Overview: One of the world’s largest reinsurance groups, Hannover Re offers property & casualty, life & health reinsurance, and specialty products with global reach and technical expertise.
Headquarters:

• Address: Karl-Wiechert-Allee 50, 30625 Hannover, Germany
• Phone: +49 511 5604-0
• Website: www.hannover-re.com
  U.S. Office:
• Hannover Reinsurance America, Inc.
• Address: 360 Hamilton Avenue, Suite 1200, White Plains, NY 10601, USA
• Phone: +1 914 872 4600

Lloyd’s of London

Country: United Kingdom
2022 Net Premiums Written: ~$10.7 billion
Overview: Lloyd’s is a marketplace of underwriters providing specialist insurance and reinsurance solutions globally, including a significant presence in the U.S. reinsurance market.
Headquarters:

• Address: One Lime Street, London EC3M 7HA, United Kingdom
• Phone: +44 20 7327 1000
• Website: www.lloyds.com
  U.S. Office:
• Lloyd’s America, Inc.
• Address: 280 Park Avenue, 9th Floor, New York, NY 10017, USA
• Phone: +1 212 302 6500

Conclusion

Excess of loss reinsurance is an indispensable risk management tool for U.S. insurers, offering protection against catastrophic losses and enhancing financial stability. By understanding its mechanisms, types, and pricing, insurance professionals can effectively leverage excess of loss treaties to optimize risk transfer and capital efficiency in today’s dynamic insurance environment.