Non-proportional treaties
Reinsurance Management provides the following types of non-proportional treaties:
- Excess of Loss (XOL) – The reinsurer pays a percentage
(usually 100%) of the amount of a loss in excess of a specified retention for each risk
coverage. An excess of loss treaty has an attachment point and coverage limit, and coverage
applies to one risk.
For example, if a storm destroys 10 covered locations, the limit is applied 10 times, once for each location.
- Net Excess of Loss (NXOL) – Similar to an excess of loss agreement. However, net excess of loss covers losses net of any recoveries from excess of loss or proportional agreements. A net excess of loss treaty has an attachment point and coverage limit.
- Per Event – Cover aggregate losses
from an event with multiple risks. A per event agreement is similar to
a net excess of loss agreement. The insurer determines its net loss after
deducting any amounts recoverable from per risk proportional or non-proportional
agreements. Then the per event agreement provides coverage if those net
losses are above the attachment point of the per event agreement.
Per event treaties are typically catastrophe, for property, or clash cover, for liability.
- Annual Aggregate – Similar to a per event treaty, but based
on a time period rather than an event. An annual aggregate treaty provides aggregate
coverage, net of any per risk coverage or more specific aggregate coverage, such as per
event coverage. The annual aggregate treaty covers total losses for an entire book of
business for a defined period of time. The period of time is usually one program year.
Annual aggregate treaties are defined to start at a specified attachment point or for losses
above a specified loss ratio. In either case, the treaty defines a coverage limit. The
coverage limit is the maximum amount the reinsurer pays under the treaty, not the top of a
layer as in other non-proportional treaties.
For example, an aggregate agreement provides reinsurance for net losses to all covered buildings after recovering per risk reinsurance for each building.
Example of ceding risk to a single excess of loss treaty
An excess of loss treaty has an attachment point of $1 million, and a coverage limit of $3 million with 0% insurer share. The reinsurer does not cover the first $1 million of any loss, but does cover 100% of the loss above $1 million up to the limit of $3 million. The reinsurer provides $2 million in excess coverage, the Coverage Limit minus the Attachment Point, often referred to as $2 million in excess of $1 million.
Treaties |
Layers of reinsurance |
|---|---|
From $3 million and up, the insurer provides 100% coverage. |
|
Excess of Loss (XOL) |
Attachment point $1 million Coverage limit $3 million |
From $0 to $1 million, the insurer provides 100% coverage. |
Losses would be covered by this agreement as follows:
- $900,000 loss – The reinsurer pays nothing because it is under the $1 million attachment point.
- $2,500,000 loss – The insurer pays the first $1 million, and the reinsurer pays the next $1,500,000.
- $4,500,000 loss – The insurer pays the first $1 million. The reinsurer pays the next $2 million up to the reinsurance limit of $3 million. The insurer pays the last $1.5 million, unless the insurer has another reinsurance agreement that covers a higher band of losses, which would typically be the case.
Examples of ceding risk to excess of loss and quota share treaties
The insurer has a program that contains two treaties. The size of the risk is $5 million.
|
Treaty |
Layers of reinsurance |
|---|---|
|
Excess of loss (XOL) |
Attachment point: $1 million Coverage limit: $5 million |
|
Quota share (QS) |
50% up to $1 million (10% of the total risk) |
If there is a $3 million loss, the insurer pays a 50% share of the first $1 million. The excess of loss agreement pays the $2 million above the $1 million attachment point. The insurer’s total net retention for any loss under $5 million is $500,000.
Example of ceding risk to quota share, excess of loss, and net excess of loss treaties
The insurer has a program that contains three treaties. The size of the risk is $5 million.|
Layers of reinsurance |
|
|---|---|
| Treaties | |
|
Excess of loss (XOL) |
Attachment point: $2 million Coverage limit: $5 million |
|
Quota share (QS) |
50% up to $1 million (10% of the total risk) |
| Net treaties | |
|
Net excess of loss (NXOL) |
Attachment point: $500,000 100% up to $1 million |
Example of ceding risk to per event and annual aggregate treaties
An insurer might be willing to hold a $1 million net retention for any one risk to property. However, if there are widespread losses from a single catastrophic event such as a tornado or flood, 100 separate losses could add up to $100 million in retained risk. To protect against a loss of this magnitude, the insurer can have a per event agreement to provide coverage for $100 million in excess of $20 million. The insurer retains $20 million in aggregate net risk. The insurer collects $80 million from the per event agreement in the case of a $100 million net loss (after per risk insurance) from a single event.
Annual aggregate treaties provide reinsurance coverage for multiple catastrophic events in a single year. For example, the insurer had planned for 2,000 slip and fall liability losses in a year, but there are claims for 10,000. The insurer’s risk retention is unacceptably high. To protect against this eventuality, the insurer negotiates an annual aggregate treaty to cover yearly net losses for $500 million in excess of $200 million. The annual aggregate treaty cedes 75% of the risk to the reinsurer.