Excess of Loss (XL)
Excess of loss is the fundamental form of non-proportional reinsurance, under which the reinsurer covers losses above an agreed retention up to a capacity limit.
Concept
Excess of loss (XL) is the fundamental contract form of non-proportional reinsurance, under which the reinsurer covers the portion of a loss that exceeds an agreed retention (priority), limited to an agreed capacity (layer); unlike proportional reinsurance, the premium is not sized proportionally to the sum insured but rather risk-adequately for the loss potential assumed.
Contract Variants
Excess-of-loss treaties are concluded in various forms depending on the basis of the retention: a working XL (per-risk excess of loss) protects against individual large losses, a catastrophe XL against the accumulated loss burden from a single catastrophe event, and a stop-loss treaty against exceeding an agreed overall loss ratio within a period.
Layer Structure
Excess-of-loss programs are frequently structured in several successive layers with different reinsurers, with each layer covering a specific band above the preceding layer; this structure allows the cedent to obtain high total capacity without having to rely entirely on a single reinsurer.