The approach of Excess Of Loss Treaty Reinsurance arrangement is quite different here from other methods. Under this system, unlike facultative, quota or surplus, the sum-insured does not form any basis and it is not expressed in terms of proportion or percentage of the sum-insured. Here, the insurer first decides as to how much amount of loss he can bear on each and every loss under a particular class of business.
The Excess Of Loss Treaty Reinsurance arrangement is such that if a loss exceeds this predetermined amount then only reinsurers will bear the balance amount of loss. Nothing is payable by the reinsurers if the amount of loss falls below this selected amount. There may usually be an upper limit of liability of the reinsurers beyond which they will not pay.
Example: Proposition: Against all public liability insurances, the insurer decides to bear a loss up to CAD. 1,00,000 in respect of each and every loss. The reinsurers agree to bear any balance amount beyond CAD. 1,00,000. The loss is for CAD. 2,00,000. There is an upper limit of CAD. 80,000.
The recovery under the reinsurance arrangement WILL BE as follows:
Loss : CAD. 2,00,000. Upper limit : CAD. 80,000
Insurer bears : CAD. 1,00,000
Reinsurer bears :CAD. 80,000
Insurer again bears the balance
because of upper limit : CAD. 20,000
Therefore, Insurer bears : CAD. 1,20,000
Reinsurer bears : CAD. 80,000
The visitors should realize that if there would have been no upper limit, reinsurers would have borne CAD. 1,00,000. This type of reinsurance arrangement is particularly helpful in cases of big liability insurances and for obtaining protection against catastrophe losses.