Definition:Per risk excess of loss reinsurance
📋 Per risk excess of loss reinsurance is a type of excess of loss reinsurance treaty in which the reinsurer indemnifies the ceding company for the portion of a loss on any single risk that exceeds a specified retention, up to a defined limit. Unlike catastrophe excess of loss treaties that aggregate losses across multiple risks arising from a single event, this structure attaches at the individual-risk level—meaning each policy or scheduled risk is evaluated independently against the retention threshold. It is a foundational tool in property and casualty reinsurance programs.
🔧 The mechanics hinge on how a "risk" is defined in the treaty wording. For a commercial property book, one risk might correspond to a single building or a group of buildings at one location. The ceding insurer sets its net retention—say, $2 million per risk—and the per risk excess treaty responds when any individual loss surpasses that amount, paying the excess up to the treaty's limit, perhaps $8 million in excess of $2 million. Each qualifying loss is adjusted separately: if a windstorm damages three separate risks, each loss is measured against the retention on its own, producing up to three separate recoveries. Reinstatement provisions typically allow the cedent to restore coverage after a recovery, usually for an additional reinstatement premium. Pricing depends on the cedent's loss history, the volatility of the underlying book, and the attachment point relative to expected loss severity.
💡 Carriers rely on per risk excess of loss reinsurance to cap the financial damage any single large loss can inflict on their results, enabling them to write policies with higher limits than their own balance sheets could comfortably support. Without it, a mid-sized insurer accepting a $10 million commercial fire risk would face concentration exposure that could destabilize its surplus. By transferring the layer above its retention to a reinsurer, the company can compete for larger accounts while maintaining stable underwriting results. This treaty type also plays a critical role during renewal negotiations, as changes to retention levels and pricing signal broader market conditions and the underwriting cycle's trajectory.
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