Legal Definitions - excess reinsurance

Excess reinsurance is a specialized type of insurance purchased by an insurance company (known as the "ceding insurer") from another insurance company (the "reinsurer") to protect itself against very large or catastrophic losses. In an excess reinsurance arrangement, the ceding insurer agrees to pay for all losses up to a predetermined amount, which is called its "retention" or "priority." Only when the total losses from a covered event or series of events exceed this retention amount does the reinsurer begin to pay, covering the portion of the loss that is "in excess" of the ceding insurer's retention, up to the limits specified in the reinsurance contract.

This mechanism allows primary insurers to manage their financial risk and stabilize their financial results by limiting their maximum potential payout on any single claim or group of claims, thereby protecting their capital and solvency.

• Imagine a regional insurance company, Coastal Home Insurance, which insures thousands of homes along a hurricane-prone coastline. Coastal Home Insurance wants to ensure that a single major hurricane doesn't jeopardize its financial stability. They enter into an excess reinsurance agreement. Their agreement states that Coastal Home Insurance will cover the first $50 million in total claims from any single hurricane event. If a hurricane causes $120 million in total damages to their policyholders, Coastal Home Insurance pays the initial $50 million, and their reinsurer pays the remaining $70 million (the "excess" over $50 million), up to the reinsurance contract's limit. This allows Coastal Home Insurance to offer coverage confidently, knowing their maximum exposure to a catastrophic event is capped.

• Consider Business Shield Insurance, an insurer that provides general liability policies to various businesses. One of their insured clients, a manufacturing company, is sued for product defects, and a jury awards the plaintiffs $75 million in damages. Business Shield Insurance has an excess reinsurance policy where they retain the first $20 million of any liability claim. In this scenario, Business Shield Insurance would pay the initial $20 million of the $75 million judgment, and their reinsurer would be responsible for the remaining $55 million, which is the amount "in excess" of Business Shield's retention. This arrangement protects Business Shield from the full financial impact of extremely large liability judgments, which could otherwise be devastating.

• A health insurance provider, Healthy Life Plans, covers medical expenses for thousands of employees across several companies. While most claims are routine, a few individuals might incur extremely high medical costs due to rare diseases or complex surgeries, potentially reaching millions of dollars. To manage this risk, Healthy Life Plans secures an excess reinsurance policy. This policy stipulates that Healthy Life Plans will pay for each individual's medical claims up to $500,000 per year. If a policyholder's treatment costs $1.2 million in a year, Healthy Life Plans pays the first $500,000, and the reinsurer covers the "excess" $700,000. This arrangement prevents a small number of very expensive claims from disproportionately impacting Healthy Life Plans' financial stability, ensuring they can continue to provide coverage to all their members.