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In this way, if the reinsured’s (excess of loss) retention of £100,000 was subject to a 50% quota share
reinsurance, the reinsured would be entitled to recover claims in excess of £100,000 without having to
deduct the 50% quota share reinsurance. Otherwise, without the additional clause, the excess of loss
reinsurance would not respond until a gross claim exceeded £200,000 (that is, a net claim of 50% of
£200,000 or £100,000). Contrary to the reinsured’s intention, the reinsurer would have the benefit of the
quota share reinsurance.

Consider this…
If an excess of loss reinsurance was silent as to whether the underlying recoveries were to be taken into account in
computing the UNL, what difference would it make to the retention of the insurance company? This last paragraph of
the UNL clause makes it clear that the underlying recoveries do form part of the contract’s deductible. In other
words, they are not agreed deductions from the UNL.

D4 Limits and deductibles

These clauses set out the limit(s) of liability and the excess(es) (or deductible(s)) on the contract, and
Clauses set out the
limit of liability and how they are to be applied (alternatively, the basis of the cover).
the excess on the
contract The amount and currency of each limit(s) and deductible(s) should be stated. There may also be
sublimits, franchises, aggregate deductibles (see example below) and ‘loss corridors’ to watch out for.

Notwithstanding the foregoing, this reinsurance shall only pay in excess of the first [ ] of losses in the
aggregate settled by the reinsured which would otherwise be recoverable hereunder.

As to how they are to be applied, the phraseology used is many and varied – for example, ‘event’, ‘loss’,
‘risk’, ‘accident’ and ‘claim’ – but how such phrases are defined is of paramount importance to the
bargain struck between the parties.
In proportional reinsurance, there is no need for a separate definition of the basis of cover as all original
losses are shared in the agreed proportion. There is no necessity to aggregate losses for the purposes of
making a reinsurance claim. However, in non-proportional reinsurance, this is not the case. The limit and Reference copy for CII Face to Face Training
deductible are applied to losses arising from a defined ‘event’ or ‘loss occurrence’ or similar, and there
is necessarily an aggregation of losses. How the ‘event’ or ‘loss occurrence’ is defined will determine
which losses may or may not be aggregated for the purposes of applying the limit and deductible.
Typically, subject to having purchased adequate vertical cover, it will be in a reinsured’s interests to
7 aggregate losses, whereas it will be in a reinsurer’s interests to split them up and so increase the
Chapter We look now at examples of the different bases on these contracts.
amount retained by the reinsured.

‘Each loss occurrence’ – catastrophe excess of loss
‘Loss occurrence’ is usually defined in the hours clause as the sum of all individual losses directly
occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of
one event. It is the event (or catastrophe) that is the proximate cause of the individual losses. However,
those losses comprising the occurrence will be limited in time and geographically.
Typically, the wording limits the loss occurrence to losses occurring during a period of 168 consecutive
hours (or a week) in a state of the USA or province of Canada and adjoining states or provinces. Those
limitations are further refined according to the particular peril or cause of the losses. Hurricane losses,
for example, occurring within a period of 72 consecutive hours may contribute to one ‘loss occurrence’
and they need not be within contiguous states.
It is important to note that, under the hours clause, it is the reinsured which reserves the right to decide
when a particular ‘loss occurrence’ commences; alternatively, the loss period. Further, if any catastrophe
is greater in duration than the relevant period, the reinsured may divide that catastrophe into two or
more ‘loss occurrences’, provided that:
1. no two periods overlap; and
2. no period commences before the earliest recorded loss.
The reinsured may, therefore, select the period in which most damage occurred if the catastrophe was of
Reinsured may select
the period in which greater duration than the period for a single event. You may have seen the operation of this clause in
most damage practice when Hurricane Katrina first made landfall in Florida and then a day or so later in Louisiana.
occurred
Insurers could then select two separate 72-hour periods in order to maximise their reinsurance
collections.