Excess of loss treaty (XL)

The excess of loss treaty, designated by the abbreviation XL, is the principal form of non-proportional reinsurance. Unlike the quota share, the sharing is not based on a percentage of premiums and claims but on monetary thresholds. The reinsurer responds only when a loss exceeds a level called the retention or priority, and its cover is capped at a defined limit above that threshold. A layer is thus described by the formula limit excess of retention, for example 8 million excess of 2 million, meaning the reinsurer takes on the part of a loss between 2 and 10 million. The cedant keeps the ordinary claims and transfers the peak risk, which protects its balance sheet against severe events while leaving it the attritional, frequency losses. XL can apply per risk, per event or as catastrophe cover. Its pricing is more technical than that of proportional reinsurance, since it rests on estimating the frequency and severity of losses reaching the layer, often using burning cost and modeling. It is the tool of choice for covering highly volatile perils such as cyber or natural catastrophes.

Under a layer of 8 million excess of 2 million, a 6-million loss is borne by the reinsurer up to 4 million, the cedant retaining the first 2 million as its priority.

excédent de sinistres, XL, excess of loss, non-proportionnelle