GIM8080 - Reinsurance and other forms of risk transfer: types of reinsurance: non-proportional reinsurance: example of layered treaty

An example of layered treaty excess of loss reinsurance is as follows.

Layer	Treaty Cover	Max sum reinsured (cumulative)	Amount reinsured by layer
4th layer	£500,000 excess of £500,000	£1m	£500,000
3rd layer	£400,000 excess of £100,000	£500,000	£400,000
2nd layer	£50,000 excess of £50,000	£100,000	£50,000
1st layer	£50,000 excess of £10,000	£50,000	£40,000
-	-	-	Deductible/excess £10,000

The overall effect is thus to insure £1m: the first loss of £50,000 is recoverable (less the £10,000 excess) from layer 1; the next £50,000 loss from layer 2 (making £100,000); the next £400,000 loss from layer 3 (making £500,000); and the final £500,000 loss from layer 4 (making £1,000,000). Under this treaty any claims in excess of £1,000,000 would not be reinsured.

In a treaty the term ‘excess of’ may be replaced by ‘less’ or shown simply as ‘xs’.