Coverage priority / limit
The reinsurance of excess loss (in English Excess of Loss, abbreviated: XL) has a very different structure from that of the proportional modalities discussed above. While in the proportional modalities it is the insured sums that determine the assignment, in the reinsurance of excess loss it is the amounts of the claims. In this type of reinsurance, the direct insurer assumes on its own account up to a certain limit (priority) all claims in the line of business defined in the contract, regardless of the amount of the insured sum. Claims that exceed this amount must be paid by the reinsurer up to the agreed coverage limit. Thus, while in proportional contracts the reinsurer participates in all claims affecting the reinsured policies,
Thus, while in proportional contracts the reinsurer participates in all claims affecting the reinsured policies, in excess loss contracts the reinsurance pays, up to the agreed coverage limit, "only" those amounts above the priority.
WXL-R and Cat -XL Coverages
Excess loss reinsurance can generally be divided into risk coverage (WXL-R) and cumulus coverage (catastrophic events). This type of contract responds to the desire of all direct insurers, who want to retain the majority of the gross premium without having to waive reinsurance protection for them in the event of large claims. However, these insurers are also “buying” a greater risk that does not provide any discharge with reinsurance. Thus, with non-proportional reinsurance, the risk that the direct insurer will actually have to pay a claim for the amount of the withholding chosen with its own funds increases considerably.
The history of this type of contract is much more recent than that of proportional contracts, since it began to be imposed only in the 1970s. An important reason for this may be the fact that the distribution of premiums between direct insurer and reinsurer does not occur directly - as in proportional reinsurance - by the structure of the contract. Rather, the reinsurer has to estimate from the beginning the loss ratio that it will have in the future under this type of contract.