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🔺 '''Excess of loss''' is a risk-transfer mechanism — used across both direct insurance and [[Definition:Reinsurance | reinsurance]] — under which the insurer or [[Definition:Reinsurer | reinsurer]] pays only the amount of a loss that exceeds a predetermined retention or [[Definition:Attachment point | attachment point]], up to a specified limit. It stands in contrast to [[Definition:Proportional reinsurance | proportional]] arrangements, where risk and premium are shared from the first dollar according to a fixed percentage. In the insurance industry, "excess of loss" appears in a variety of contexts: as a structuring principle for commercial policies with [[Definition:Self-insured retention (SIR) | self-insured retentions]], as the basis for [[Definition:Excess-of-loss reinsurance | excess-of-loss reinsurance treaties]], and as a general descriptor for any coverage that triggers only above a threshold.

⚙️ The core mechanic is straightforward. A retention (or deductible) is set — perhaps $500,000 per occurrence — and the excess-of-loss coverage responds to whatever portion of a qualifying loss exceeds that retention, up to the policy or treaty limit. For a $2 million loss with a $500,000 retention and a $5 million excess-of-loss limit, the coverage pays $1.5 million. [[Definition:Underwriting | Underwriters]] pricing excess-of-loss structures focus on the [[Definition:Loss severity | severity]] distribution of claims above the retention, modeling how often and how large losses are likely to be in that elevated range. Key variables include the [[Definition:Loss frequency | frequency]] of losses expected to breach the retention, the tail behavior of the loss distribution, and any trends — such as [[Definition:Social inflation | social inflation]] or [[Definition:Catastrophe risk | catastrophe exposure]] — that could drive severity upward.

📌 This structure is a workhorse of the global insurance and reinsurance markets because it aligns incentives effectively: the party retaining the first layer of loss has a direct financial stake in [[Definition:Loss control | loss prevention]] and [[Definition:Claims management | claims management]], while the party providing excess-of-loss coverage takes on a more limited, higher-severity risk that can be priced and capitalized accordingly. For [[Definition:Cedent | cedents]] purchasing reinsurance, an excess-of-loss treaty provides balance-sheet protection against large individual losses or accumulations without requiring them to cede a share of every dollar of premium. For commercial policyholders, choosing the right retention in an excess-of-loss structure is a strategic decision that balances premium savings against cash-flow exposure and [[Definition:Risk tolerance | risk tolerance]].

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Excess-of-loss reinsurance]]
* [[Definition:Attachment point]]
* [[Definition:Self-insured retention (SIR)]]
* [[Definition:Proportional reinsurance]]
* [[Definition:Aggregate excess of loss]]
* [[Definition:Excess layer]]
{{Div col end}}

Definition:Excess of loss - Revision history

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