Excess-of-Loss Reinsurance: Retention, Attachment Point, and Coverage Limit

Excess-of-loss reinsurance is non-proportional reinsurance that pays covered losses above a specified retention or attachment point, usually up to a contractual limit.

Unlike Quota Share Reinsurance, excess-of-loss protection does not normally share every covered premium dollar and every loss in a fixed percentage. It is designed to protect the insurer against severity above an agreed layer.

A simple layer example

Suppose an insurer buys $100 million excess of $50 million of catastrophe coverage.

That shorthand means the insurer retains the first $50 million of covered loss, and the reinsurance layer can then reimburse up to $100 million above that retention.

1Covered event loss            $130M
2Insurer retention               50M
3Reinsurance layer recovery      80M
4Net covered loss to insurer     50M

If the event loss were $180 million instead:

1Covered event loss            $180M
2Insurer retention               50M
3Reinsurance limit              100M
4Loss above layer                30M
5Net covered loss to insurer     80M

Once the layer's $100 million limit is exhausted, additional covered loss falls back to the insurer unless another reinsurance layer applies.

Retention and attachment point

In common investor usage, the retention is the amount the insurer bears before the excess layer responds. The attachment point is the loss level at which reinsurance begins to pay.

For a simple single layer, those amounts can be the same. In complex programs, terminology and aggregation rules can differ, so the treaty or issuer disclosure controls.

A lower retention generally transfers more loss severity to reinsurers but usually costs more premium, all else equal.

Per-risk versus catastrophe excess of loss

Excess-of-loss protection can be structured around different units of loss.

• Per-risk excess of loss can protect against unusually large losses on individual insured risks.
• Catastrophe excess of loss can protect against aggregate losses from a defined catastrophe event affecting many policies.

Other structures can cover aggregate annual losses above a threshold.

These forms should not be treated as interchangeable merely because all use attachment points and limits.

Reinsurance layers and towers

Large catastrophe programs often consist of multiple layers purchased from different reinsurers.

For example:

1Layer 1: $100M excess of $50M
2Layer 2: $150M excess of $150M
3Layer 3: $200M excess of $300M

The program protects different bands of severity. The insurer may retain some loss below the tower, between layers, through co-participation, or above the top limit.

The headline total limit therefore does not by itself describe net catastrophe exposure.

Reinstatements and exhaustion

A layer can be exhausted by a severe event. Some contracts allow the coverage limit to be reinstated for another event, sometimes for an additional premium.

Investors analyzing catastrophe exposure should check whether reported limits are:

• per occurrence;
• annual aggregate;
• subject to one or more reinstatements; or
• already eroded by prior events.

A nominal $100 million layer may not provide $100 million of fresh protection after earlier losses.

Excess-of-loss cost can rise without gross exposure rising

Reinsurance pricing responds to market conditions, loss experience, modeled catastrophe risk, capacity, attachment, limit, and contract terms.

An insurer can therefore report higher Ceded Premiums even if its underlying insured exposure is stable. The higher cost may reflect tighter reinsurance markets or broader protection rather than more policies written.

Investor workflow

When reviewing an excess-of-loss program:

1. Identify the retention. How much covered loss does the insurer absorb before protection begins?
2. Identify each limit. What is the maximum recovery from each layer?
3. Check peril and geography scope. Hurricane, earthquake, wildfire, cyber, and other perils can have different programs.
4. Check occurrence versus aggregate terms. One event and an entire year's losses are different exposure measures.
5. Check reinstatements. Determine whether exhausted limits can be restored and at what cost.
6. Check net exposure above the tower. Losses can exceed the top of the program.
7. Check collectibility. A contractual recovery becomes a Reinsurance Recoverable and introduces counterparty risk.

Excess-of-loss reinsurance limits the insurer's loss severity within defined layers. It does not impose a universal cap on every loss the company can experience.

Sources

• 2025 insurer filing describing a catastrophe treaty with a $200 million retention and $2.14 billion per-occurrence coverage
• MGIC 2025 reinsurance disclosure showing excess-of-loss ceded premiums

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