Difference between surplus reinsurance and risk XL

[Naman Jain]

Hi,

I want to understand the difference between surplus reinsurance and risk XL as in both the scenarios the reinsurer would pay excess amount over the insurer's retention limit on individual lives.

In stop loss XL or aggregate XL the reinsurer's payment is still over the retention limit in aggregate basis but in risk XL the payment is on individual risk so not sure how this is different from surplus reinsurance.

Thanks.

 

[Sarah Byrne]

Hi Naman

For many health and care policies with a fixed sum assured, surplus and risk XL work in a similar way. For our products, it helps to think about a tiered critical illness insurance policy, for example with a sum assured of 100k.

Let's have a surplus treaty with a 50k retention (50k / 100k = 50% reinsured) about and a risk XL treaty with a 50k retention limit.

For the risk XL treaty, if a tiered claim comes in for 25k, the insurer will pay the full claim as it is less than the retention limit. If a further claim comes in on the policy for 50k, the insurer will pay the first 25k (taking the total to the retention limit) and then the reinsurer will pay the next 50k. Insurer total = 50k, Reinsurer total = 25k

For the surplus treaty, if a tiered claim comes in for 25k, the reinsurer will pay 50% of the claim, so 12.5k and the insurer will pay the rest, 12.5k. If a further claim comes in on the policy for 50k, the reinsurer will pay 50% of the claim, so 25k and the insurer will pay the rest, 25k. Insurer total = 37.5k, Reinsurer total = 37.5k

If the claim was just for the full sum assured, both arrangements would pay the same amount.

Hope this helps explain the difference. Remember that surplus is proportional so we need to convert it to a proportion and then apply that percentage.

Sarah