For a primary insurer, one main benefit of purchasing an excess of loss reinsurance treaty is that it can

For a primary insurer, one main benefit of purchasing an excess of loss reinsurance treaty is that it can

• A. Increase premium rates automatically.
• B. Eliminate all risk.
• C. Reduce the amount of capital the insurer must have on hand.
• D. Increase underwriting profit by 20%.

Answer: (C)

Excess of loss reinsurance is a non‑proportional arrangement that shifts the insurer’s large, tail losses to the reinsurer above an attachment point up to a limit. By transferring this high‑severity risk, the insurer’s net exposure is reduced, which lowers the amount of capital that must be held against potential losses. This capital relief helps stabilize results and frees capital for other uses. The contract doesn’t eliminate all risk, nor does it automatically increase premium rates or ensure underwriting profit—the key benefit is reduced capital requirements.

Excess of loss reinsurance is a non‑proportional arrangement that shifts the insurer’s large, tail losses to the reinsurer above an attachment point up to a limit. By transferring this high‑severity risk, the insurer’s net exposure is reduced, which lowers the amount of capital that must be held against potential losses. This capital relief helps stabilize results and frees capital for other uses. The contract doesn’t eliminate all risk, nor does it automatically increase premium rates or ensure underwriting profit—the key benefit is reduced capital requirements.