Excess loss reinsurance
The excess of loss , even XL (from English, excess of loss'), is a special form of reinsurance . It belongs to the area of so - called non - proportional reinsurance . While with proportional reinsurance ( quota and total excess ) a proportional share is always reinsured, with a non-proportional excess loss the reinsurance is based on the amount of the damage actually occurred. Put simply, a kind of damage limit (priority) as well as the amount of the maximum compensation to be borne by the reinsurer in the event of a claim (liability distance ) are agreed in the case of excess damage . For this reinsurance cover, the insurance company has to pay a fixed reinsurance premium.
The short notation liability xs priority is common for excess damage .
example
The following example is used to explain how excess loss reinsurance works. An insurance company agrees an excess of loss with a reinsurer for damage in excess of EUR 50,000. The maximum amount of compensation to the primary insurer by the reinsurer per claim ( liability route ) is agreed at EUR 250,000. The excess of loss is in short notation "EUR 250,000 x EUR 50,000". Thereupon three damages occur in the amount of 20,000 EUR, 100,000 EUR and 350,000 EUR. According to the agreement, the claims expenses are divided between direct insurers and reinsurers as follows:
- 20,000 EUR: Since this damage is below the priority of 50,000 EUR, it must be borne in full by the primary insurer.
- 100,000 EUR: primary insurer: 50,000 EUR (priority), reinsurer: 50,000 EUR
- 350,000 EUR: primary insurer: 100,000 EUR (priority and the part then exceeding the liability section), reinsurer: 250,000 EUR (full liability section)
Expressed mathematically: X is the original damage, which is covered by the excess damage. The damage borne by the reinsurer is then: min (liability, max (0, X priority))
Thus the 100,000 EUR damage would be the following burden for the reinsurer: min (250,000, max (0, 100,000 - 50,000)) = min (250,000, 50,000) = 50,000 EUR
details
In practice, the number of detention routes is limited. This limitation can either be an AAL (Annual Aggregated Limit) or a replenishment (reinstatements). In the example above: Assuming the excess loss has an AAL of EUR 500,000 (in other words: the excess loss has a replenishment), and assuming that there are three covered losses of EUR 300,000, EUR 150,000 and EUR 250,000 in a coverage period, the Reinsurer for the last loss only EUR 150,000 instead of EUR 200,000 if the first two losses had not occurred. This is because the reinsurer paid EUR 250,000 for the first loss and EUR 100,000 for the second loss, i.e. a total of EUR 350,000. Since the limit was agreed at EUR 500,000, the last damage is only covered up to EUR 150,000.
The premium that the policyholder (usually the primary insurer) has to pay for this protection is usually given as a percentage of the policyholder's original premium . This original premium is also called GNPI (Gross Net Premium Income). That means: If 10% of the GNPI was agreed and the protected company receives a premium of EUR 1,000,000 in the original premium, the protected company has to pay a premium of EUR 100,000 to the reinsurer.
See also
- Annual excess loss: Limitation of the total loss burden of the primary insurer from a branch or line of business during a contract period