Risk Management in Banking and Insurance · Structure and Type of Re-insurance
Non-Proportional (Excess of Loss) Reinsurance Explained
Updated 11 October 2026 · Fact-checked
In excess of loss reinsurance, the reinsurer pays only the part of a loss that exceeds an agreed retention (priority), up to an agreed limit. It is non-proportional: premium and loss are not shared in a fixed ratio. To solve a problem, find the loss, subtract the priority, and cap the result at the limit.
Understand Non-Proportional (Excess of Loss) Reinsurance
In proportional reinsurance, the insurer and reinsurer share premium and every loss in the same ratio. Non-proportional reinsurance works differently. The reinsurer has no share in small losses. It pays only when a loss crosses a set amount.
That set amount is the priority (also called retention, deductible or attachment point). The insurer bears all loss up to the priority. The reinsurer pays the loss above it, up to the limit, which is the most the reinsurer will pay under the cover. Anything above priority plus limit comes back to the insurer unless a higher layer covers it.
There are three common forms. Excess of loss per risk applies to a loss on a single risk, such as one factory or one policy. Excess of loss per event (catastrophe cover) applies to the total of all losses from one event, such as a cyclone or flood. Stop loss applies to the insurer's aggregate result over a period, usually a year. It pays when the loss ratio or total claims go beyond an agreed level.
The premium is not a fixed share of the original premium. It is a price for the layer, set by the expected loss to that layer, usually as a rate on the insurer's subject premium income. So the reinsurer's premium and its claims have no fixed proportion.
The insurer uses this cover to protect its net retention from large or accumulated losses and to stabilise results. Under the Insurance Act, 1938, the Authority can examine an insurer's reinsurance treaties (Section 101C), and can require changes or non-renewal of a treaty whose terms are not favourable to the insurer or are detrimental to public interest (Section 34F).
Key rules to remember
- Reinsurer's payment on one loss
- Recovery = minimum of [ maximum of (Loss − Priority, 0), Limit ]
- Used for per risk and per event covers. The loss is the amount of the single risk loss or the total event loss.
- Insurer's net retained loss
- Net loss = Gross loss − Recovery
- Includes the priority plus any loss above priority + limit.
- Top of the layer
- Layer ceiling = Priority + Limit
- Often written as Limit xs Priority, for example ₹40 lakh xs ₹10 lakh.
- Stop loss attachment
- Recovery = minimum of [ maximum of (Aggregate loss ratio − Attachment ratio, 0) × Subject premium, Limit ]
- Use when the cover is stated as a loss ratio. If it is stated in rupees, subtract the rupee attachment from aggregate losses instead.
How to solve Non-Proportional (Excess of Loss) Reinsurance questions
Use this method for any numerical or descriptive question on excess of loss covers.
- 1Identify the type of cover: per risk, per event or stop loss. This decides what you add up.
- 2Write the layer in the form limit xs priority and note the ceiling (priority + limit).
- 3Decide the loss to test: a single risk loss, the total of all losses from one event, or the aggregate for the period.
- 4Subtract the priority. If the result is zero or negative, the recovery is nil.
- 5Cap the result at the limit. This is the reinsurer's payment.
- 6Compute the insurer's net loss as gross loss minus recovery. Check that the two parts add up to the gross loss.
- 7If the question asks for a comparison, state whether the cover is proportional or not and what that means for premium and loss sharing.
- 8Close with a one-line conclusion, such as which losses the reinsurer pays and what the insurer keeps.
Quickest way: Subtract, cap, check
When to use it: For MCQs asking for the reinsurer's payment or the insurer's net loss under a stated layer.
- Read the layer as limit xs priority.
- Compute loss − priority. If negative, answer nil.
- Take the smaller of that figure and the limit.
- Net loss = loss − recovery. Confirm it is at least the priority when the loss exceeds it.
- For event covers, add all losses from the same event before subtracting.
Common mistakes in Non-Proportional (Excess of Loss) Reinsurance
Applying the priority to each policy loss when the cover is per event.
Students confuse per risk and per event covers.
Fix: For per event, first total all losses from the one event, then apply the priority once.
Paying the reinsurer the whole loss once the priority is crossed.
Students treat the priority like a trigger instead of a deductible.
Fix: Subtract the priority. The reinsurer pays only the excess.
Forgetting the limit and giving a recovery above it.
Students stop after subtracting the priority.
Fix: Always compare with the limit and take the smaller figure.
Saying the reinsurer shares the premium in the same ratio as losses.
Proportional treaty logic is carried over.
Fix: State that in excess of loss the premium is a separate price for the layer, not a share of the original premium.
Treating stop loss as covering a single large claim.
The name sounds like a cap on one loss.
Fix: Stop loss covers the aggregate result for a period, usually measured as a loss ratio or total claims.
Worked examples
Example 1
An insurer buys an excess of loss per risk cover of ₹40,00,000 xs ₹10,00,000. Three fire losses on three separate risks are ₹6,00,000, ₹25,00,000 and ₹70,00,000. Find the reinsurer's payment on each and the insurer's net loss on each.
Show the solution
- Layer: priority ₹10,00,000, limit ₹40,00,000, ceiling ₹50,00,000.
- Loss ₹6,00,000: below the priority, so recovery is nil. Net loss is ₹6,00,000.
- Loss ₹25,00,000: excess is ₹25,00,000 − ₹10,00,000 = ₹15,00,000, which is below the limit. Recovery is ₹15,00,000. Net loss is ₹10,00,000.
- Loss ₹70,00,000: excess is ₹60,00,000, which is above the limit. Recovery is capped at ₹40,00,000. Net loss is ₹70,00,000 − ₹40,00,000 = ₹30,00,000.
- Check: the net loss is the priority ₹10,00,000 plus ₹20,00,000 above the ceiling, giving ₹30,00,000.
Answer: Recoveries: nil, ₹15,00,000 and ₹40,00,000. Net losses: ₹6,00,000, ₹10,00,000 and ₹30,00,000.
Example 2
A cyclone damages 5 insured properties of an insurer with losses of ₹12,00,000, ₹18,00,000, ₹30,00,000, ₹25,00,000 and ₹15,00,000. The insurer holds a catastrophe excess of loss per event cover of ₹60,00,000 xs ₹70,00,000. Find the reinsurer's payment, the insurer's net loss, and explain why a per risk cover would work differently.
Show the solution
- Total event loss: 12 + 18 + 30 + 25 + 15 = ₹1,00,00,000 (100 lakh).
- Priority is ₹70,00,000, so the excess is ₹1,00,00,000 − ₹70,00,000 = ₹30,00,000.
- The limit is ₹60,00,000, so the excess is within the limit. Recovery is ₹30,00,000.
- Net loss to the insurer: ₹1,00,00,000 − ₹30,00,000 = ₹70,00,000, which equals the priority.
- A per risk cover tests each property separately. With a priority of ₹70,00,000, no single loss here would exceed it, so nothing would be recovered.
Answer: The reinsurer pays ₹30,00,000 and the insurer retains ₹70,00,000. A per event cover adds up all losses from the one event, so it responds even when no single risk loss is large.
Exam tips
- Always state the layer as limit xs priority and show the ceiling. Examiners look for this in numerical answers.
- In compare-and-contrast questions, cover premium basis, loss sharing, treatment of small losses and purpose. Keep it to a clear point-by-point format.
- Read the wording to see whether the loss is per risk, per event or aggregate. Marks are lost most often by testing the wrong figure.
- In MCQs, check whether the question asks for the reinsurer's payment or the insurer's net loss. Both can appear as options.
- If a question links to regulation, mention that the Authority can examine reinsurance treaties under Section 101C and can direct changes under Section 34F where terms are unfavourable to the insurer or detrimental to public interest.
Practice questions from Structure and Type of Re-insurance
- Which statement best describes facultative reinsurance as distinct from treaty reinsurance?
- Under Section 6B of the Insurance Act, 1938, a scheme to bring an insurer's capital structure into conformity with section 6A is sanctioned …
- A surplus treaty has a retention line of Rs 2 crore and the insurer cedes the excess over its retention to the reinsurer. For a risk with su…
- Himalaya Insurance has an excess of loss treaty covering Rs 8 crore in excess of Rs 2 crore retention per risk, applied to each risk separat…
- Under a quota share treaty, a reinsurer accepts 40% of every policy written by the cedant, in return for 40% of the premium and 40% of the l…
Non-Proportional (Excess of Loss) Reinsurance in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Non-Proportional (Excess of Loss) Reinsurance: frequently asked questions
What is the difference between proportional and non-proportional reinsurance?
In proportional reinsurance, premium and every loss are shared in a fixed ratio. In non-proportional reinsurance, the reinsurer pays only the part of a loss above a priority, up to a limit. Small losses stay fully with the insurer.
What is stop loss reinsurance?
Stop loss covers the insurer's aggregate result over a period, usually a year. It pays when total claims or the loss ratio go above an agreed level, up to a limit. It protects overall results, not a single loss.
What are priority and limit in excess of loss cover?
The priority is the amount of loss the insurer keeps before the reinsurer pays. The limit is the most the reinsurer will pay in the layer. The layer is written as limit xs priority.
How is per risk different from per event excess of loss?
Per risk applies the priority to a loss on a single risk. Per event adds up all losses arising from one event, such as a flood, and applies the priority to that total.