Reinsurance helps insurers manage risk, and one key method is non-proportional reinsurance. Unlike proportional coverage, it only activates when losses exceed a set threshold. This structure is essential for protecting insurers against catastrophic or unusually large claims, ensuring financial stability in volatile and high-risk insurance environments.
What is Non-Proportional Reinsurance?
Non-proportional reinsurance, also known as excess of loss reinsurance, is a type of coverage where the reinsurer only steps in when losses exceed a predetermined limit, called the retention or attachment point. Unlike proportional reinsurance, where both premiums and claims are shared, non-proportional coverage focuses solely on the magnitude of individual or accumulated losses.
This model allows primary insurers to retain control over everyday claims while transferring large, unexpected losses to the reinsurer. It’s a strategic approach used to safeguard capital and ensure business continuity after a significant claim event.
Key Features:
- The reinsurer pays only when losses surpass the retention
- Based on loss severity, not the number of policies or claims
- Premiums are calculated based on risk exposure and historical data
Example:
If an insurer retains R10 million and a claim reaches R25 million, the reinsurer would cover the R15 million excess, up to the agreed limit.
This setup is especially useful in industries where catastrophic risks like earthquakes, floods, or industrial fires, could financially devastate an insurer. By adopting this method, insurers enhance financial resilience, maintain underwriting stability, and continue offering coverage even in high-risk areas.
Also read: The Role of Reinsurance in Global Risk Management
Types of Non-Proportional Reinsurance
There are three primary types of non-proportional reinsurance. Each one is suited to a specific risk structure and helps insurers deal with different types of claim volatility.
2.1 Per Risk Excess of Loss
- Covers individual, high-value risks
- Kicks in when a single policyholder’s loss exceeds the retention
- Common in property or industrial lines, where one large claim could be financially overwhelming
2.2 Per Event (Catastrophe) Excess of Loss
- Applies to multiple claims stemming from the same event
- Example: A hurricane causes widespread damage across many policyholders
- Once the total claim value from that event surpasses the retention, the reinsurer pays the excess
2.3 Aggregate Excess of Loss
- Protects against the accumulation of many small-to-medium claims
- Activated when total claims over a defined period (e.g., one year) exceed the aggregate retention limit
- Valuable for insurers with frequent, lower-level claims that can add up over time
Each of these structures allows insurers to customize their risk transfer strategies, ensuring they are covered across different layers of potential exposure. Many insurers use a combination of types to achieve both horizontal and vertical protection within their portfolio.
Also read: Risk Management Strategies for Business Success
How Non-Proportional Reinsurance Works
Non-proportional reinsurance operates using a threshold-based system. The reinsurer provides coverage only after losses exceed a defined retention, which is agreed upon in the contract. This model ensures the primary insurer remains responsible for manageable losses while transferring catastrophic exposure to the reinsurer.
How It Works:
- Retention: The maximum loss amount the insurer retains
- Limit: The maximum amount the reinsurer will pay above the retention
- Layering: Multiple reinsurers may cover different tiers of loss (e.g., R10M–R50M, R50M–R100M)
Example:
If an insurer retains R10 million and a claim is R70 million:
- The insurer pays R10 million
- The reinsurer pays the remaining R60 million, provided it falls within the coverage limit
Contractual Variations:
- Per claim, per event, or aggregate loss basis
- Subject to negotiation based on the insurer’s risk appetite and historical loss trends
This structure gives insurers financial flexibility, helping them preserve capital, comply with solvency regulations, and remain competitive, even in high-loss years. It’s a foundational tool for managing volatility and ensuring business continuity.
Also read: Unlocking Strategic Risk Management
When Should Insurers Use Non-Proportional Reinsurance?
Non-proportional reinsurance is essential when insurers are exposed to low-frequency, high-severity risks. These are rare but potentially devastating events that can erode an insurer’s capital in a single blow. This model acts as a financial backstop, absorbing losses that could otherwise cripple the insurer.
Ideal Use Cases:
- Insurers in catastrophe-prone regions (e.g. floods, earthquakes)
- Large-value portfolios with risks in aviation, maritime, or energy sectors
- Mid-sized insurers with limited capital reserves
- New insurers entering volatile or unfamiliar markets
Strategic Benefits:
- Capital protection: Prevents financial ruin after one major loss
- Increased underwriting capacity: Enables writing more policies safely
- Regulatory compliance: Helps meet solvency capital requirements
- Market stability: Investors and regulators value robust risk management structures
Insurers can also use non-proportional reinsurance as a growth tool, allowing them to enter new product lines or geographic areas with reduced risk exposure. It’s especially effective when combined with proportional reinsurance, forming a layered defense against all forms of claim volatility.
Ultimately, it’s a powerful tool to balance growth with risk and a necessity for any modern insurance operation.
Also read: Advantages & Disadvantages of Captive Insurance
Conclusion
Non-proportional reinsurance plays a critical role in protecting insurers from catastrophic or unexpected losses. By covering claims that exceed a set threshold, it ensures financial stability and long-term resilience. For insurers managing volatile or high-severity risks, it’s an essential strategy for maintaining solvency and underwriting confidence.
At IML, we specialize in innovative insurance solutions tailored to your business needs. Whether you’re seeking protection against catastrophic losses or exploring new market opportunities, our team is here to help you navigate complex risk with confidence. Contact us today to learn how insurance can protect your portfolio and support your long-term growth.