Non-Proportional Reinsurance: Excess of Loss and Stop Loss
IC-81 tests non-proportional covers, where the reinsurer pays only the layer above the cedant's retention. These treaties protect against frequency or severity shocks rather than sharing every risk proportionally.
Core rules
- Per-risk excess of loss responds when a single risk loss exceeds the retention, up to the limit.
- Per-occurrence or per-event excess of loss responds to accumulated losses from one event, such as a catastrophe.
- Stop loss protects the cedant's aggregate loss ratio, for example 80% in excess of 70% of subject premium, subject to a maximum.
- Key terms are attachment point, limit, layer, subject premium, rate on line and reinstatement.
- Reinstatement provisions restore the limit after a loss, usually for an additional premium.
Worked example
A per-risk excess of loss treaty has a retention of INR 10 lakh and a limit of INR 40 lakh. A INR 25 lakh loss produces a reinsurance recovery of INR 15 lakh; the cedant pays INR 10 lakh. A INR 70 lakh loss produces only INR 40 lakh from the reinsurer because the layer is exhausted; the cedant bears INR 30 lakh, being the INR 10 lakh retention plus INR 30 lakh above the limit. If the treaty has one reinstatement at 100%, a second loss needs reinstatement premium before the limit is restored.
Traps
Do not confuse the retention with the limit. Do not ignore the layer's exhaustion point. Do not treat a per-risk cover as a catastrophe cover. Do not forget reinstatement premium or the definition of a single event.