Excess of loss pricing

Category: Reinsurance pricing · Reviewed by Mark Fox, Broker · Renewals · Last reviewed

Excess of loss pricing

Excess of loss (XL or XoL) pricing sets the premium for a non-proportional reinsurance layer that responds when an underlying loss (per-risk, per-event, or in aggregate) exceeds a defined attachment point. The layer pays from the attachment up to a defined limit.

Layer notation

“£10m xs £5m” means the layer attaches at £5m and pays a maximum of £10m (so it responds between £5m and £15m of underlying loss).

Pricing methods

Burning cost

Historical losses indexed to the current cost level, developed to ultimate, capped at the layer limit, divided by the exposure base. Multiplied by projected exposure, loaded for expenses, reinstatements and risk margin.

Exposure rating

For layers above the experience-credible range, indicate the layer rate by applying:

• Ground-up large-loss frequency by occupancy / construction / band.
• Severity distribution (e.g. lognormal, Pareto) calibrated by industry data.
• Integrated to derive the proportion of ground-up losses falling in the layer.

Frequency-severity

Simulate claim count and size, evaluate the layer for each simulated event, average across simulations.

Cat-model rating

For natural catastrophe layers, vendor cat model output (RMS, AIR) drives the loss distribution to the layer.

Loadings

• Risk margin (typically a multiple of the layer SD).
• Reinstatement premium structure.
• Brokerage.
• Capacity provider cost of capital (return on the layer’s required capital).
• Minimum and deposit premium (MDP).

References

• Swiss Re. Non-proportional reinsurance pricing.
• IFoA. Practical Guide to Reinsurance.
• Lloyd’s documentation.

Cross-references

• Reinsurance pricing
• Burning cost reinsurance
• Exposure rating

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.