Texas General Lines — Property and CasualtyGeneral InsuranceMedium
A small business owner is looking for property insurance but is concerned about the potential for a catastrophic loss that could exceed the limits of a standard policy. The owner wants to ensure that even in the event of a severe, widespread disaster, their business would be able to rebuild. What type of insurance arrangement would best address this specific concern?
- AFacultative reinsurance
- BExcess of loss reinsurance
- CQuota share reinsurance
- DTreaty reinsurance
Show answer & explanationAnswer & explanation
Correct answer: B. Excess of loss reinsurance
Excess of loss reinsurance is designed to protect the primary insurer from catastrophic losses by covering claims that exceed a predetermined retention limit. This directly addresses the business owner's concern about losses exceeding standard policy limits due to a severe disaster.
Why the other options are wrong
- A. Facultative reinsurance covers individual risks, not a portfolio of risks, and is less suitable for widespread catastrophic events.
- C. Quota share reinsurance involves sharing premiums and losses proportionally, which doesn't directly address the concern of a single, large catastrophic loss exceeding policy limits.
- D. Treaty reinsurance covers an entire class of business but does not specifically target losses exceeding a certain amount in the same way as excess of loss.
Excess of Loss Reinsurance
A form of reinsurance where the reinsurer pays losses that exceed a specific amount (the retention limit) set by the primary insurer, up to a maximum amount.
- Protects against catastrophic losses.
- Reinsurer pays only after primary insurer's retention is exhausted.
- Commonly used for property and liability lines.
Memory trick: Reinsurers come in many forms, each with a unique protective charm.