Excess of Loss Reinsurance, also known as non-proportional or non-proportional excess reinsurance, is a type of reinsurance that provides coverage for losses that exceed a specified threshold. In contrast to proportional reinsurance (where the reinsurer shares a proportion of the ceding company’s risks), excess of loss reinsurance is triggered when losses exceed a predetermined amount.

Here are key features of Excess of Loss Reinsurance:

1. **Threshold or Retention:** The ceding insurance company retains a certain amount of risk for each policy or for its entire portfolio, known as the “retention” or “attachment point.” The excess of loss reinsurance only comes into play when losses surpass this retention level.

2. **Layered Structure:** Excess of Loss Reinsurance is often structured in layers, with each layer having its own retention and coverage limit. The layers are stacked on top of each other, starting from the ceding company’s retention. For example, there might be a first layer covering losses above the retention up to a certain limit, a second layer for losses above that limit up to another limit, and so on.

3. **Coverage Limit:** Each layer of excess of loss reinsurance has a coverage limit, which represents the maximum amount the reinsurer will pay for losses within that layer. Once losses exceed this limit, the ceding company is responsible for the additional amount.

4. **Types of Excess of Loss Reinsurance:**
– **Per Risk Excess of Loss:** Covers losses on a per-risk or per-event basis.
– **Per Occurrence Excess of Loss:** Covers losses for a single occurrence or event, regardless of the number of policies affected.
– **Aggregate Excess of Loss:** Covers losses exceeding a specified aggregate amount over a defined period, such as a year.

5. **Risk Transfer:** Excess of Loss Reinsurance transfers a significant portion of the risk from the ceding company to the reinsurer, providing financial protection against large and unexpected losses.

6. **Cost:** The cost of excess of loss reinsurance is generally related to the coverage limits and the layers chosen by the ceding company. It is often more expensive than proportional reinsurance since it covers only catastrophic or high-severity losses.

Excess of Loss Reinsurance is commonly used in property and casualty insurance, where the risk of large losses from natural disasters or other catastrophic events is a concern. By utilizing excess of loss reinsurance, insurance companies can limit their exposure to severe losses, thereby enhancing their overall risk management strategy.