Under non-proportional reinsurance, the reinsurer accepts losses in excess of an agreed amount, subject to an upper limit. There is no proportionate sharing of premium and losses. The reinsurer instead calculates a premium based on the loss experience and exposure for which cover is provided. The main types of non-proportional reinsurance are:
- Risk excess of loss. Under this arrangement, the direct insurer pays the first $x of losses (for example, $ 1 million) arising from an event and the reinsurer pays $y in excess of $x (for example, $4million in excess of $1 million). There is often more than one excess of loss treaty and the cover is expressed in layers, each one building on the layer below.
- Catastrophe excess of loss. In addition to protecting individual risks, the insurer must also consider the likelihood and possible effects of catastrophic events, such as hurricanes, that will result in an accumulation of a large number of smaller individual claims on its policies. Catastrophe excess of loss reinsurance is designed to reduce the effects of such infrequent but major losses. The insurers net retention may be as high as $50 – $100 million.
- Excess of loss ratio (stop loss). This type of reinsurance is designed to prevent wide fluctuations in the net claims ratio of a particular insurer’s account from one financial year to another. The treaty will come into operation when the loss ratio for the specified class of business exceeds an agreed percentage (for, example 90%) and provides protection up to an agreed upper loss ratio (for example 125%). Once the upper limit of the treaty has been reached, the direct insurer is liable for any further losses.