Excess of Loss is a form of reinsurance where the first insurer, who has provided cover to an insured, takes out reinsurance from another insurer. It therefore provides cover for the first insurer’s possible loss in the case of claims.

The reinsurer will have an obligation if a specific claim, or a number of claims, exceeds a certain amount. His liability will be limited to the balance of losses exceeding the agreed amount as stated in the reinsurance policy. For example the excess of loss reinsurance policy may state the first insurer will pay for claims up to R500 000. If he receives claims of R750 000 the reinsurer will pay the balance of R250 000.

Reinsurance can be taken out for a specific policy where the insurance company has a huge exposure or for the sum total of a number of claims coming from a common, defined risk area. For example, if an insurance company finds that they are experiencing a large number of claims for hijacking incidents, they may decide to reinsure the risk of hijacking with a reinsurer.

Insurers also use excess of loss reinsurance where the liability under a particular policy may be difficult to calculate.