Cumulative Collusive Excess Cover

Cumulative collusive excess cover refers to a reinsurance contract in which losses over a predetermined limit are shared between the cedent and the reinsurance company. Cumulative collusive excess cover allows the cedent, which is the company that has purchased the reinsurance contact, to further reduce its exposure to a specific insured risk.

Insurance companies want to bring in as a high an amount of premiums as possible while limiting their exposure – often using cumulative collusive excess cover – to the risks created when they underwrite new insurance policies. By reducing their risk exposure, they are reducing the likelihood of having to pay for a claim, while also providing more space to underwrite new policy. One way of reducing the risk exposure is by purchasing a reinsurance contract.

When purchasing a reinsurance contract, the insurer identifies the risk that it wants to cede to the reinsurance company. In turn, the reinsurer indicates the fee that it requires for taking on this risk. Typically, the reinsurer will be responsible for losses up to an agreed upon limit, after which the insurance company is responsible for any losses over that limit. In some reinsurance contracts, however, the parties agree to share in some of the losses over the limit, making this type of coverage agreement a cumulative collusive excess coverage.

For example, an insurance company underwrites general liability policies to a number of local businesses. In order to reduce its risk to claims filed against these policies, and in order to free up some risk capacity to underwrite additional policies, the insurer enters into a reinsurance contract with a reinsurer. In exchange for a portion of the premiums, the reinsurer is willing to take on $500,000 of losses. The policy also includes cumulative collusive excess language that indicates that losses over $500,000 but less than $750,000 will be shared by the two parties. If losses from claims total $600,000, the two parties will be responsible for a proportion of the excess $100,000.

Many consider cumulative collusive excess cover as a complementary policy to a surplus share treaty, in which the reinsurer would cover all losses beyond a certain level. In a surplus share treaty, the ceding insurer retains liabilities up to a specific amount, called a line, with any remaining liability being ceded to the reinsurer. The reinsurer, thus, does not participate in all risks and instead participates in only the risks above what the insurer has retained, making this type of reinsurance different from quota-share reinsurance. The total amount of risk that a reinsurance treaty covers, called the capacity, is typically expressed in terms of a multiple of the insurer’s lines.