Excess of loss credit insurance
A form of credit insurance where a large insured keeps its ordinary losses under a high deductible and transfers only exceptional losses, while keeping control of its own limits.
Excess of loss credit insurance is aimed at large companies with a credit management department able to assess their own customers. Instead of requesting an insurer limit for each buyer, the insured sets its own exposures under documented procedures the insurer has validated, and retains losses up to a high annual deductible, sometimes several million euros. The insurer steps in only above that, for exceptional losses from a major default or a series of defaults in the year, up to a ceiling. The product resembles catastrophe cover applied to credit risk: the company self-funds its ordinary losses, which it knows and controls, and transfers the tail of its distribution. For the insured it offers commercial flexibility, since credit decisions remain its own, and a lower premium than a whole turnover policy. For the insurer, it rests on the quality of the insured's internal procedures, which it audits, and it exposes it to concentration risk on the insured's large customers, which the deductible does not always neutralize.
Textbook case: a distribution group with 2 billion euros of credit sales retains the first 5 million of customer losses each year, and buys 40 million of cover above that. A major customer's default causes it 22 million of losses: it bears 5, the insurer pays 17.
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