Reinsurance and other forms of risk transfer: types of reinsurance: non-proportional reinsurance: example of layered treaty
An example of layered treaty excess of loss reinsurance is as follows.
|Layer||Treaty Cover||Max sum reinsured (cumulative)||Amount reinsured by layer|
|4th layer||£500,000 excess of £500,000||£1m||£500,000|
|3rd layer||£400,000 excess of £100,000||£500,000||£400,000|
|2nd layer||£50,000 excess of £50,000||£100,000||£50,000|
|1st layer||£50,000 excess of £10,000||£50,000||£40,000|
The overall effect is thus to insure £1m: the first loss of £50,000 is recoverable (less the £10,000 excess) from layer 1; the next £50,000 loss from layer 2 (making £100,000); the next £400,000 loss from layer 3 (making £500,000); and the final £500,000 loss from layer 4 (making £1,000,000). Under this treaty any claims in excess of £1,000,000 would not be reinsured.
In a treaty the term ‘excess of’ may be replaced by ‘less’ or shown simply as ‘xs’.