Article

Excess of Loss (XoL) reinsurance is a cornerstone of risk management within captive insurance structures, providing captives with protection against severe or catastrophic losses that exceed a defined threshold. For companies leveraging captives to retain underwriting profits while maintaining financial stability, XoL reinsurance is an essential tool.

What is Excess of Loss (XoL) Reinsurance?

Excess of Loss reinsurance is a non-proportional form of risk transfer. Unlike proportional arrangements—such as quota share treaties—where premiums and losses are shared at fixed percentages, XoL only activates once losses surpass a specified retention or attachment point. The reinsurer then indemnifies the captive for the portion of the loss exceeding that threshold, up to an agreed limit.​

For example, if a captive retains $500k per loss and a claim of $1 million arises, the reinsurer covers the $500k excess. This structure limits the captive’s exposure to high-severity, low-frequency events.

Types of XoL Reinsurance

Captives typically use three main variations of excess of loss coverage, depending on their exposure profile:

• Per Risk (Per Policy) XoL: Provides protection against large individual claims, such as losses from a single insured asset.​
• Per Occurrence (Catastrophe) XoL: Covers aggregated losses from a single catastrophic event like a hurricane, explosion, or product recall.​
• Aggregate XoL: Protects against accumulation of multiple smaller losses that, when combined, exceed a specified annual total.​

Role of XoL Reinsurance in Captives

For captives—insurance subsidiaries owned by their parent companies—XoL reinsurance enhances both financial and strategic flexibility. Since captives often manage risk portfolios concentrated around their parent’s operations, a single catastrophic event can jeopardize their capital base. XoL coverage mitigates this concentration risk by transferring extreme loss scenarios to reinsurers.​

Captives use XoL reinsurance to:

• Preserve Capital: Protect solvency and maintain surplus reserves after large losses.
• Enhance Capacity: Enable captives to write larger or more volatile lines of business without disproportionate capital commitments.
• Stabilize Earnings: Smooth results by shielding the captive from income volatility tied to infrequent but severe losses.​
• Meet Regulatory or Rating Requirements: Satisfy solvency ratios or risk-based capital metrics through structured risk transfer.​

Structuring Considerations for Captives

When structuring XoL programs, captives and their managers must evaluate:

• Attachment Point: The threshold balancing cost efficiency and meaningful protection.
• Reinsurance Limit: The maximum exposure ceded per event or policy year.
• Premium Calculation: Often determined using the burning cost method, which reflects the expected frequency and severity of historical losses.​
• Collateral Requirements: Some reinsurers may require collateral or trust accounts, particularly in cross-border arrangements.

It is important to maintain strong relationships with reinsurance markets to negotiate terms that align with the captive’s risk appetite and long-term financial objectives.​

XoL vs. Quota Share in Captives

Feature	XoL Reinsurance	Quota Share Reinsurance
Type	Non-proportional	Proportional
Trigger	Loss exceeds retention	All premiums and losses shared by percentage
Objective	Protect from catastrophic or volatility events	Balance risk-sharing and capital management
Impact	Reduces peak exposure	Controls overall exposure and earnings variation

Strategic Value in Captive Programs

For global companies using captives as strategic risk finance vehicles, XoL reinsurance provides a dynamic safety net. It empowers businesses to retain routine underwriting profits and risk exposure while securing protection against financial shocks. This balance supports long-term capital efficiency and operational resilience—key goals for any well-managed captive program.​ Captives Insure can facilitate XoL reinsurance for property, GL, Auto, and more in wholly owned captive structures, allowing for maximum premium retention while limiting the total exposure to risk.