Definition:Per-risk excess-of-loss reinsurance
🔄 Per-risk excess-of-loss reinsurance is a form of non-proportional reinsurance in which the reinsurer indemnifies the ceding insurer for the portion of a loss on a single risk that exceeds a specified retention (also called the attachment point), up to a defined limit. Unlike catastrophe excess-of-loss reinsurance, which responds when aggregate losses from a single event across many policies breach a threshold, per-risk excess-of-loss applies on an individual risk basis — for example, a single building, a single marine hull, or a single insured entity. This structure is fundamental to how primary insurers manage their exposure to large individual losses across lines such as property, marine, engineering, and fire insurance.
📐 The mechanics are straightforward in concept but require careful calibration in practice. The ceding insurer selects a retention level that reflects its risk appetite and capital position — say, $5 million per risk — and purchases reinsurance that responds to individual losses exceeding that amount, up to an agreed limit (e.g., $20 million excess of $5 million). If a covered loss on a single risk totals $18 million, the ceding insurer bears the first $5 million and the reinsurer pays the remaining $13 million. Pricing is driven by the ceding insurer's historical loss experience, the profile of its book (including the distribution of total insured values and probable maximum losses), the attachment point relative to average and large loss frequency, and prevailing reinsurance market conditions. Defining what constitutes a single "risk" is one of the most negotiated aspects of the contract: the treaty must specify risk definitions clearly to avoid disputes about whether adjacent properties, related entities, or bundled exposures should be treated as one risk or several.
💡 Per-risk excess-of-loss reinsurance serves as a cornerstone of prudent capital management for primary insurers, enabling them to write individual risks with high insured values while capping their net exposure to any single large loss. Without this protection, an insurer writing commercial property or industrial risks would need to maintain substantially more capital to absorb shock losses, or would be forced to restrict the size of risks it could accept. The structure also gives insurers the confidence to compete for large accounts in the commercial and specialty markets, knowing that their reinsurance program will absorb the peak severity. For reinsurers, per-risk excess-of-loss treaties offer a diversified book of business with limited aggregation exposure (since the trigger is individual-risk losses rather than event-driven accumulations), though they must remain vigilant about the adequacy of risk definitions and the ceding insurer's underwriting discipline. Globally, this treaty form features prominently in reinsurance programs structured through Lloyd's, Continental European markets, and Asian hubs alike.
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