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Excess of Loss Reinsurance

There are many aspects of Insurance of which the general public are probably unaware.

Everyone knows that they have an excess on their Motor and Household policies whereby they have to bear some of the cost of a claim themselves so that the Insurance Company doesn't have to bear the whole cost of any claim, but Insurance as a business is more complex than that.

Consider for example the cost of insuring a fleet of aircraft . Each plane is worth probably close to a million pounds, so when you have a fleet of them you are talking serious money.

Now, no one Lloyds Syndicate or single Insurance Company could bear the loss of one aircraft let alone several in a fleet, so what happens? The airline itself doesn't send someone around hundreds of Lloyds Syndicates and Insurance Companies; they get an Insurance Broking firm to do that for them as they have the expertise to know who to go to.

Initially however, the broker will only go to around thirty or forty syndicates and companies and get each one to take a percentage of the risk, some taking a larger percentage than others. The largest percentage is taken by the first one or two visited and are known as the ‘leads', this makes the job easier to get others to ‘follow'.

The percentages written will be far greater than any underwriter could bear if an aircraft crashes, so each one will reinsure a good percentage of their original line in much the same way as a bookmaker lays off his bets.

But that is not the end of the story. Each aspect of an aircraft, or fleet is insured separately, firstly the Hull or Body - then the Liabilities i.e. the passengers , also the cargo i.e. Passengers luggage and so on. Although an underwriter has reinsured each fleet (he would take on several fleets) by the end of the financial year he could still be liable for much more than he could reasonably stand.

This is where the Excess Loss Reinsurance comes into play.

He will look at the whole of his liabilities and weigh up the possibilities of claims during the year. He knows through experience how much his business could stand so he takes out extra blanket insurances to cover losses in layers over and above that figure. Supposing he could stand losses of say one million pounds, and that his losses may go up to two millions pounds, he would take out an Excess Loss Reinsurance of one million pounds in excess of one million pounds.If he still considers they may go even higher he would take out another one of say one million in excess of the two million he is covered for. Dependant on the type of his portfolio he could have several layers of Excess. In Non-Marine business which covers the hurricanes which you often read about, the losses do run into several millions of pounds, and being so unpredictable it is difficult to know just how large the losses could be so there could be four or five layers.

You will see from this that insurance can be spread very far and very wide, it is indeed a world wide business.

Article written by Frank Hiscox