Excess of Loss Reinsurance

Example

“The regional insurer purchased excess of loss reinsurance with a $5 million retention, meaning their reinsurer would cover any individual claim exceeding $5 million up to $50 million.”

Memory Tip

Think 'insurance for insurance companies' - when an insurer's losses get too big, their reinsurer steps in to cover the excess.

Why It Matters

Excess of loss reinsurance allows insurance companies to take on risks they couldn't otherwise handle, ensuring they remain financially stable after major catastrophes. This ultimately protects policyholders by preventing insurance company bankruptcies and ensuring claims can be paid even after devastating events.

Common Misconception

Consumers often don't realize that reinsurance affects them at all, thinking it's just business between insurance companies. However, reinsurance is crucial for keeping insurance available and affordable, as it allows insurers to spread catastrophic risks globally rather than going out of business after major disasters.

In Practice

A homeowners insurance company in Florida purchased excess of loss reinsurance with a $25 million retention for hurricane losses. When Hurricane Ian caused $80 million in claims, the company paid the first $25 million from their reserves, while their reinsurers covered the remaining $55 million. This arrangement allowed the company to continue operating and paying claims rather than facing bankruptcy, protecting thousands of policyholders who might otherwise have been left with unpaid claims.

Etymology

Combines 'excess of loss' (meaning beyond a certain loss amount) with 'reinsurance' (insurance purchased by insurance companies), dating to the early development of risk-sharing among insurers in the 19th century.

Common Misspellings

Related Terms

More in insurance

Other insurance terms you should know

See Also