Definition:Per-risk
📐 Per-risk is a basis of attachment used in reinsurance and insurance that defines how coverage limits, retentions, and recoveries apply individually to each insured risk rather than in aggregate across a portfolio or event. In excess of loss reinsurance, a per-risk treaty responds when the loss on a single insured risk exceeds the ceding company's specified retention, regardless of whether that loss is part of a broader catastrophic event affecting multiple risks. This distinguishes per-risk coverage from per-occurrence or aggregate structures, where the trigger is tied to total losses from a single event or cumulative losses over a period.
⚙️ A per-risk excess of loss treaty typically operates with a defined retention — say, $1 million — and a limit that applies separately to each risk in the ceding insurer's portfolio. If a fire destroys a single commercial building with a total loss of $5 million, and the ceding insurer's per-risk retention is $1 million, the reinsurer pays $4 million (up to the treaty limit) for that individual risk. The critical underwriting and actuarial challenge lies in defining what constitutes a single "risk" — a determination that varies by line of business, geography, and treaty wording. In property insurance, a risk is often defined by physical location or a scheduled set of insured values at one premises, while in marine insurance, it might refer to a single hull or cargo shipment. Disputes over risk definition can arise when interconnected properties or operations blur the boundaries, making precise treaty language essential. Per-risk treaties are commonly purchased by commercial property insurers and specialty carriers to protect against large individual losses while retaining smaller, more predictable claims within their own balance sheet.
💡 The per-risk basis plays a foundational role in how insurers structure their reinsurance programs and manage earnings volatility. By capping the net cost of any single large loss, per-risk reinsurance allows a ceding company to write larger individual risks — or underwrite a broader portfolio of mid-sized risks — than its own capital would prudently support. For reinsurers, per-risk treaties offer attractive diversification because they are driven by the frequency and severity of individual loss events rather than by correlated catastrophe scenarios, making them a useful complement to catastrophe excess of loss covers. Globally, per-risk excess of loss is a staple product offered by major reinsurers and through Lloyd's syndicates, and its pricing reflects the ceding company's risk profile, loss history, industry mix, and maximum probable loss characteristics on its largest exposures.
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