How excess of loss works
Non-proportional reinsurance does not share premiums and losses in a fixed ratio. Instead, the cedent keeps every loss up to a retention (also called the priority or attachment point), and the reinsurer pays the excess up to an agreed limit. A layer is described as "limit xs retention", for example "$10 million xs $5 million". The reinsurer's premium is negotiated for the layer, not derived from the original policy premium.
Main types
| Type | Trigger | Typical use |
|---|---|---|
| Per risk excess of loss | Loss to one risk above the retention | Property, engineering |
| Catastrophe excess of loss | All losses from one event combined | Hurricane, earthquake, flood |
| Casualty / clash excess | Per occurrence, one or several policies | Liability, workers' compensation |
| Aggregate excess / stop loss | Total losses or loss ratio for the year | Frequency protection, crop, health |
Layers and programs
Large programs are split into several layers, each placed with a panel of reinsurers. Lower "working" layers are hit often and priced on loss experience; upper layers are hit rarely and priced mostly on exposure and catastrophe models. Cedents choose retentions according to their capital, risk appetite and regulatory requirements in the US, Europe or elsewhere.
Reinstatements and hours clauses
Once a layer pays a loss, its limit is used up. A reinstatement restores it, usually for an additional premium calculated pro rata to the amount paid. Catastrophe treaties define how many reinstatements are available. An hours clause sets how long a period of losses from one peril counts as a single event, which determines how many retentions the cedent pays.
Pricing
- Burning cost: past losses to the layer, trended and developed, divided by premium income.
- Exposure rating: curves and limit profiles estimate expected loss when history is thin.
- Catastrophe modeling: vendor and in-house models simulate events to price property cat layers.
- Rate on line: the reinsurance premium divided by the layer limit, a quick measure of price.
Ultimate net loss
Excess of loss treaties apply the retention to the cedent's ultimate net loss: the amount actually paid after deducting salvage, subrogation recoveries and other reinsurance that inures to the treaty's benefit. Whether loss adjustment expenses are included in the loss or shared pro rata, and whether underlying quota share recoveries come first, can change the reinsurer's payment considerably, so these definitions deserve close review.
Index and stability clauses
Long-tail liability layers in Europe often carry an index (stabilization) clause, which adjusts the retention and limit for wage or price inflation between the loss date and payment. US casualty treaties rarely use it, so inflation risk shifts more to the reinsurer, which is one reason US casualty pricing is sensitive to claims inflation.
Market perspective
Property catastrophe excess of loss is the core product of Bermuda reinsurers and is a key line for Lloyd's syndicates and global groups in Europe. Insurance-linked securities, such as catastrophe bonds and collateralized reinsurance, mostly provide non-proportional capacity. In Asia, Japanese typhoon and earthquake programs renew largely on April 1, while US Florida programs renew on June 1. Compare with proportional reinsurance.
Next steps
Polis Re helps cedents and captives model retention options and prepare submissions, with placement through licensed reinsurance intermediaries and authorized reinsurers. Request support or read the glossary.