Property Per Risk Excess of Loss

by William H. Eyre*

     In excess of loss reinsurance, the reinsurer is liable for only that portion of a loss which is in excess of a predetermined amount (retention) borne by the reinsured company, in contrast to proportional reinsurance (quota share or surplus share) where the ceding company and reinsurer share all losses from the ground up in proportion to the respective percentage share each retains on the risk ceded. Per risk excess is a form of excess of loss reinsurance in which the retention and limit of reinsurance apply "per risk" rather than per accident, per event or in the aggregate. Per risk excess is generally employed by medium-to-large companies, where surplus relief (recovery of expenses and costs from reinsurance ceded) is not of great concern from a financial standpoint. Per risk excess is also generally employed on short-tail business in property lines rather than long-tail, in casualty lines.


     The purposes of property per risk excess are generally to afford for the reinsured company the following achievements:

1. additional capacity for a known maximum costs;

2. retention by the company of more of its premium;

3. stability, by levelling out large losses, which allows better planning by management; and

4. simplicity and economy of administration and clerical work --

a. The retention and amount of reinsurance are fixed; therefore no individual judgement is required on each risk, as in proportional.

b. Small losses not exceeding the net retention do not involve the reinsurer, and the associated expense of handling is saved.

c. Accounts are simplified, i.e., the total net written (or earned) premiums of the company are multiplied by a rate, with no calculation for each policy being necessary.

* CPCU, formerly Executive Vice President of Intere Intermediaries, Inc., in New York City until his retirement in 1983. Now, independent reinsurance consultant at 150 east 72nd Street, New York, New York 10021.

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