Definition
Excess of Loss Reinsurance
Excess of loss is a non-proportional reinsurance arrangement where the reinsurer pays the part of a loss that exceeds the insurer's retention up to a limit.
Rather than sharing every loss proportionally, an excess-of-loss (XL) treaty responds only when a loss (or aggregate of losses from one event) breaches an agreed threshold, the insurer's retention, paying the excess up to the treaty limit. It is the standard protection against large individual or catastrophe losses.
XL reinsurance lets insurers cap their exposure to severe events while keeping the premium on the bulk of ordinary, smaller claims. It contrasts with proportional (quota-share or surplus) treaties that share premiums and losses from the first rupee.
Related terms
- ReinsuranceReinsurance is insurance for insurers, where a reinsurer assumes part of the risk an insurer has underwritten in exchange for a share of the premium.
- RetentionRetention is the portion of a risk an insurer keeps on its own books rather than ceding to reinsurers.
- Catastrophe RiskCatastrophe risk is the exposure to large, correlated losses from a single major event such as an earthquake, cyclone or flood.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.