How does excess of loss reinsurance differ from quota share?

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AcadiFi · Accepted Answer

Excess of loss (XoL) is non-proportional: the reinsurer pays only when losses exceed a retention. Ambergate might retain $5M per risk and buy '$45M xs $5M' — meaning XoL responds for losses between $5M and $50M. Layers stack: Layer 1 ($5M xs $5M), Layer 2 ($10M xs $10M), Layer 3 ($30M xs $20M), each with different reinsurers and reinstatement provisions. XoL is efficient for severity protection and capital relief on tail risk while retaining attritional margin. ```mermaid flowchart TB L0[Retention
$0-5M] --> L1[Layer 1
$5M xs $5M] L1 --> L2[Layer 2
$10M xs $10M] L2 --> L3[Layer 3
$30M xs $20M] L3 --> L4[Cat Cover
$200M xs $50M] ``` Three XoL flavors exist: per-risk (one policy breach), per-event/cat (one event aggregating many policies), and aggregate XoL (annual accumulated losses). Reinstatement premiums apply when a layer is exhausted — a '100% at 100%' reinstatement costs one full annual premium to restore cover after a loss. Rate on line (ROL) equals premium divided by limit; a $2M premium for $50M limit gives 4% ROL. XoL preserves the cedent's share of good years but concentrates retained losses on frequency. Most insurers combine QS on growth lines with XoL on mature portfolios, calibrated through capital models that optimize return on required capital.

How does excess of loss reinsurance differ from quota share?

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