In excess of loss reinsurance, who covers losses that exceed a predetermined limit?

• A. The primary insurer
• B. The reinsurer
• C. The policyholder
• D. The state government

Answer: (B)

In excess of loss reinsurance, the reinsurer is the entity that covers losses that exceed a predetermined limit set in the reinsurance agreement. This type of reinsurance is designed to protect the primary insurer from large losses by transferring the risk associated with those high-severity claims. When losses go beyond the established threshold, the reinsurer takes on the responsibility for the additional costs incurred, enabling the primary insurer to manage their risk exposure more effectively. By utilizing this method, insurers can stabilize their financial standing and maintain solvency even in the face of significant claims. This arrangement fosters greater confidence in the insurance market, as it provides a safety net for insurers against catastrophic losses.