Over-Line

Over-line insurance coverage exceeds the amount typically offered by an insurer or reinsurer. Over-line coverage can occur when an insurer underwrites more policies than normal, or when a reinsurer accepts a larger amount of liabilities through a reinsurance treaty than it usually does.

Over-line coverage refers to the amount of insurance that exceeds an insurer's normal capacity. This is important because insurers primarily make money through their underwriting activities. In exchange for indemnifying a policyholder, the insurance company collects a premium, and invests this premium in a variety of different assets in order to generate a profit. Investments tend to be low risk and relatively liquid, since the insurer needs to be sure that it has access to funds if claims are made against its policies. The amount of liability that an insurer can take on is referred to as its capacity.

The amount of capacity an insurer has depends on its financial strength and excess capital, or funds not currently used to cover policy-related liabilities. An insurer with excess capacity can underwrite new policies, and thus bring in more premiums.

An insurer’s capacity typically remains relatively constant over time. An insurer may maintain surplus capacity in order to provide a bigger cushion in case of an increase in claims, or to be able to enter a new market rapidly. In some cases, however, an insurer may underwrite policies that increase its total liabilities above what it is typically willing to take on. This increase is considered to be over-line, as it represents a level of capacity above normal.

Capacity also refers to the insurer’s ability to accept risk. For an individual insurer, the maximum amount of risk it can underwrite is based on its financial condition. The adequacy of an insurer's capital relative to its exposure to loss is also an important measure of solvency, or the ability of the insurer to meet its long-term financial obligations.

State insurance regulators pay close attention to the amount of liability that insurance companies take on through their underwriting activities. Insurers are required to report their financial position to state regulators, who use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency. If a state determines an insurer has gone over-line, it may prompt closer scrutiny from regulators, since the insurer may be taking on an unusual or unfamiliar level of risk.