VII Reinsurance & Specialty Risk
Excess of loss treaty
A non-proportional reinsurance agreement in which the insurer bears losses up to a set amount and the reinsurer pays the portion above it, up to an agreed limit.
How it works
A treaty, the annual cession agreement between an insurer and a reinsurer, comes in two main forms. Under a proportional treaty the reinsurer shares the same percentage of premium and loss. An excess of loss treaty has no such sharing: the insurer pays the first slice of every loss, its retention, and the reinsurer takes on only the amount above that threshold.
Cover is built in layers. A first layer might, for example, pay 50 million dollars of a loss above 50 million dollars, and a second layer 100 million dollars above 100 million. Each layer has its own limit and price. Cover can be written per risk, per event (catastrophe cover) or on annual aggregate losses.
The trap in measurement is describing price with a single rate. In the same renewal, lower layers can get cheaper while upper layers get dearer, or the price can be held flat by raising the retention. The headline rate then falls, yet the risk the insurer carries on its own balance sheet grows. When reading renewal news, check how the retention and the limit moved alongside the rate.
Why it matters here
This agreement's threshold shows most clearly whether a risk can still be transferred. After war, political violence or a major catastrophe, reinsurers first raise the retention or move the risk outside the layer; even if the price looks flat, the loss stays with the insurer and from there passes to the insured and the public budget. We read the 1 January renewal for Gulf energy facilities and marine war cover through how this threshold moves.