Excess Limits Premium

Excess limits premium, commonly found in casualty reinsurance contracts, is the amount paid for coverage beyond the basic liability limits found in an insurance contract. 

In an insurance contract, the insured party purchases a predefined amount of coverage against a specific type of risk from the insurer. Once the policyholder reaches the coverage limit, the insurer is no longer responsible for covering losses. Coverage limitations can create a scenario in which the loss from a risk exceeds the amount of coverage. The result is the insured potentially has to cover a significant portion of the remaining losses out of pocket.

A party purchasing a casualty policy must balance the amount of coverage desired with the amount of premium they are willing to pay. The higher the coverage limits are in the policy, the higher the premiums will be. If the policyholder should never file a claim close to the coverage limit, then they are likely over-insured. The policyholder could realize cost savings by reducing the amount of coverage, thereby reducing premiums. 

In cases where there is still is the possibility that losses may exceed the amount of basic coverage, the insured may use an excess coverage rider. The excess coverage rider triggers during incidents of high damage.

The calculation of premiums for excess limits coverage is a factor of the premium paid for the basic coverage. Excess coverage limits are issued in tranches, or portions, with a pre-determined factor assigned to each level. Typically, the factor increases as the excess limit tranche increases. 

For example, an engineering company holds a casualty insurance policy with a basic coverage limit of $1 million. The company purchases excess coverage for up to $5 million in damages. The tranches of excess coverage are at $1 million increments. The engineering firm will pay 20% of the premium of their basic coverage for the first $1 million excess. Each section tranche increases with the $5 million excess limit level assessed at 50% of the base premium.

Excess limits premiums are most commonly found in reinsurance contracts. Reinsurance is a method for insurance providers to sell high-risk policies they hold to a secondary provider, thereby spreading the risk of loss from a catastrophic event. Excess limit premium is more specific to excess of loss reinsurance rather than to pro rata reinsurance. 

Excess limits are used to reimburse the ceding insurer for a loss more than a pre-determined holding level. This arrangement protects the original ceding company from risks that have the potential to be severe and possibly place the ceding insurer into financial distress, such as in the case of a hurricane or flood. The reinsurer will evaluate the possible risk to determine the cost of the excess limits coverage. If the reinsurer estimates a low loss probability, the more economical excess limits premiums may make this a cost-effective approach for the ceding company.