Definition:Per-risk excess of loss
🏢 Per-risk excess of loss is a non-proportional reinsurance arrangement under which the reinsurer responds to losses on a single risk — typically a single insured location, policy, or account — that exceed the ceding insurer's retention, up to a stated limit. Unlike catastrophe excess of loss, which aggregates losses across many risks hit by one event, this treaty focuses on the severity of an individual risk irrespective of the cause. It is most commonly found in property lines and specialty classes where a single large insured asset can generate outsized losses.
🔧 Consider a property carrier that writes a book with many mid-market commercial accounts but also insures a handful of high-value manufacturing plants. By purchasing per-risk excess of loss with, say, a $2 million attachment and $18 million of cover, the carrier limits its net exposure on any single plant to $2 million while the reinsurer absorbs losses between $2 million and $20 million. Underwriters at the ceding company can then write larger individual risks without concentrating too much net retained liability, effectively expanding their capacity. Pricing is driven by the cedent's loss experience, the risk profile of the underlying book, and the reinsurer's view of trend — including construction costs and social inflation pressures.
📊 For portfolio construction, per-risk excess of loss gives primary insurers considerable strategic flexibility. It smooths out the volatility created by any single bad loss, protects surplus from shock events, and enables more competitive quoting on larger accounts. Rating agencies view well-structured per-risk programs favorably because they demonstrate disciplined risk management. Cedents often purchase this layer alongside catastrophe excess of loss to cover both the single-risk severity scenario and the multi-risk event scenario, creating a comprehensive reinsurance program that addresses different dimensions of loss potential.
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