Definition
Excess Per Risk Reinsurance (Reinsurance): A type of reinsurance whereby the reinsurer indemnifies the ceding company for losses that exceed a specified retention limit on a per-risk basis but only up to a predetermined maximum amount for each individual occurrence.
Meaning
Excess Per Risk Reinsurance is employed by insurance companies to manage significant exposures to single, substantial risks. It ensures that losses on specific individual risks that exceed a predetermined retention threshold are covered, thereby protecting the insurance provider from catastrophic financial impact.
Etymology and Background
The term “Excess” denotes the amount beyond a designated limit, while “Per Risk” indicates the coverage applies to losses per each distinct risk rather than aggregating across a range of incidents or policies. Reinsurance dates back to 1370 with the first documented contract and has evolved to include various forms, such as Excess Per Risk, to meet different insurer needs.
Key Takeaways
- Specific Coverage: Protects against losses on individual risks, unlike aggregate methods that consider multiple occurrences.
- Retention Limits: A retention level is predetermined, up to which the insurance company bears losses.
- Risk Management: Primarily used for large single risks that could be catastrophic to the insurer’s finances.
- Financial Stability: A strategy to enhance financial robustness by mitigating the severity of high-cost risk exposures.
Differences and Similarities
Differences:
- Excess Per Risk Reinsurance vs. Excess of Loss Reinsurance:
- Per Risk: Coverage is safeguarded for individual risks exceeding the retention limit.
- Excess of Loss: Coverage applies once aggregate losses exceed an agreed amount.
Similarities:
- Both methods aim to stabilize an insurer’s financial foundation.
- Each involves predetermined retention amounts and upper limits.
- Utilize similar reinsurance contract structures.
Synonyms
- Layered Reinsurance
- Per Risk Excess Coverage
Antonyms
- Proportional Reinsurance
- Quota Share Reinsurance
Related Terms with Definitions
- Retention Limit: The maximum amount an insurer will pay out-of-pocket before reinsurance kicks in.
- Catastrophe Reinsurance: Specific reinsurance for extremely large events like natural disasters.
- Non-Proportional Reinsurance: Reinsurance premised on excess loss rather than a proportional share.
Frequently Asked Questions
What is the main benefit of Excess Per Risk Reinsurance?
It provides protection against severe swings in claims for large individual risks, ensuring financial stability for the insurer.
How does Excess Per Risk Reinsurance affect premium calculations?
Premiums are higher for risks that require tailored excess per risk coverage due to the increased cost for the reinsurer assuming significant risk.
Why would an insurer use this type of reinsurance?
To protect against substantial financial impacts from single large risks that could hamper the company’s financial health.
Is Excess Per Risk Reinsurance suitable for every insurance company?
It’s most appropriate for insurers with substantial high-value individual risks rather than those dealing mainly in high-frequency, low-severity scenarios.
Exciting Facts
- The practice of reinsurance itself began in the 14th century, showcasing the long-standing necessity of shared risk protection.
- Major skyscrapers and infrastructure projects often require complex reinsurance, including per-risk excess coverage, due to their massive potential financial implications.
Quotations from Notable Writers
“In risk management, it’s not the odds that count, but the impact.” — Peter L. Bernstein
Proverbs
“Trust, but verify.” — Russian Proverb, applied here to the confidence in reinsurance while understanding specific contractual provisions.
Humorous Sayings
- “Insurance is like underwear; you can think you’re all secure till you suddenly need the best kind.”
- “Reinsurance: because even playing it safe needs a backup plan!”
Related Government Regulations
- Solvency II: A comprehensive EU-wide framework managing insurers’ capital, significantly affecting reinsurance structures.
- NAIC Model Laws: In the U.S., the National Association of Insurance Commissioners sets guidelines affecting both primary and reinsurance contracts.
Suggested Literature and Other Sources for Further Studies
- “Moral Hazard and Competition in Reinsurance” by Andreas A. Jobst
- “Reinsurance Regulation: A Contemporary Analysis” by Oliver D. Williams
- Thatcher, “Risk Management and Insurance,” Dec. 2023
Quizzes
Inspirational Thought for Your Insurance Journey: “An ounce of prevention is worth a pound of cure—especially in the world of reinsurance.”
Stay covered, stay confident, and always safeguard your financial fortresses!
David Allen, October 2023.
