Page 160 - Liability Insurance IC74

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(b) Give an outline how this treaty
operates.

Ans. The Excess of Loss protection can be arranged in layers.
The example given below can clear the operating
process of the treaty :

Suppose, an Insurance company issued 50 policies with
varying sums covering risks located in a particular area.
On each of these policies, the net retention is Rs. 1
crore. In a severe catastrophic event all the 50 policies
may become total losses.

The total accumulated loss of the insurance company
arising out of this event will be Rs 50 crore. If the
insurance company has an Excess of Loss Treaty for
Rs 40 crore excess of Rs 10 crore, whereby the net
retained loss will be recovered from the reinsurers. Thus
the net retained loss of the insurance company will never
exceed Rs 10 crore per event.

The Excess of Loss Treaty may be arranged in several
layers depending upon the requirement of the insurance
company and may be on the basis of per risk or per
event.

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