What is Excess of Loss Insurance?

Most businesses today are used to deal with day-to-day business losses. But what happens when you’re confronted with a large, unexpected loss? In this article, Anke Uebele, Head of XoL in Germany, Austria and Switzerland, answers “what is XoL in insurance?” and reviews the excess of loss cover Allianz Trade can provide.

An excess of loss policy covers losses that exceed a specified threshold – a loss greater than anything your  credit management or regular insurance cover can handle. Your company’s cash flow management, balance sheet and very survival could be at risk.

Companies that believe they can’t face or will not handle this kind of disaster often turn to excess of loss credit insurance for protection.

“With excess of loss insurance, the insured is responsible up to an annual level of aggregated loss and the policy pays out once this is exceeded,” says Anke Uebele, Head of XoL in Germany, Austria and Switzerland for Allianz Trade. “The XoL insurance kicks in, in our wording, after the company’s ‘aggregate first loss’.”

The big difference between XoL insurance and XoL reinsurance is who buys it and why.

XoL insurance is purchased by the insured business directly to protect itself, whereas XoL reinsurance is cover bought by an insurance company to help cover its own exposure.

“The three main risks covered by excess of loss insurance are protection against default, insolvency risk and political risk,” says Anke. “ ESG and sustainability risks are becoming more and more a discussion, especially for big corporations,” she continues.

The Covid-19 pandemic fallout is another reason companies are seeking excess of loss credit insurance cover. “The unexpected severity losses, or the continued risk for an unexpected excess of loss, is much higher because, in the past, you were maybe in a better position to foresee certain trends. Today, it is more unpredictable,” Anke explains. “Knowing that unanticipated bad surprises are covered by an excess of loss insurance policy gives you peace of mind and the flexibility to manage your day-to-day trade credit decisions.”

“The main drivers for excess of loss cover are the quality and the size of the insured’s clients, meaning their credit risk rating, the maximum liability, the amount of trade risk that is retained by the insured, and the past-performance of the insured,” Anke says.

Excess of loss underwriting is more specialised than general trade credit insurance cover. “There is no one excess of loss solution for all,” Anke says. XOL insurance, or excess of loss cover, is customised to meet individual needs and is based on the premise that a client is proficient in handling his or her own credit management and can sustain losses of a fairly high level. The insured benefits from a high degree of participation in creating the excess of loss credit insurance policy.

“The customer assesses the creditworthiness of their clients, structures the policy, and together we set the excess of loss insurance policy value with them,” explains Anke. “In return, we are very flexible in approving the credit limits the customer wants to set because they have credit control procedures in place to minimise trade credit risk and credit management ability to vet their clients. Basically, it’s a true partnership.”

In general, XoL insurance has been sought after by big companies that have an advanced credit-management system. “But today smaller companies are also looking for excess of loss insurance policies,” says Anke.  “And a lot of uninsured companies with sophisticated credit management are looking for this kind of policy because they don’t want to rely only on one source for their insurance cover; they want to have a 360° view on their liabilities in case there is an unexpected loss.”

Specifically, a Allianz Trade XoL insurance provides:

1. A high discretionary credit limit, meaning the company can set their own credit limits on the majority of their customers.
2. The flexibility to manage day-to-day credit decisions.
3. Higher levels of coverage and lower policy administration costs than standard trade credit insurance policies.
4. Policy cover for 12 months, cancellable only in case of premium non-payment or insolvency of the insured.

“In addition, our excess of loss credit insurance provides access to our proprietary intelligence network which analyses daily changes in corporate solvency representing 92% of global GDP,” adds Anke. “We can give customers really qualified answers and insight into their sector, their clients and the countries they trade with.”

“The big difference is the amount of coverage, and how much and what we check in creating the policy,” says Anke. “In traditional trade credit insurance (or called accounts receivable insurance), when a company asks for a credit limit, we do ‘ground up’ diligence: we check all the customers of a client, and we review and approve the credit limits. In the excess of loss insurance, we check our clients’ ability to assess all their customers and set their own credit limits.”

But excess of loss cover and trade credit insurance are not mutually exclusive. “Unlike specialised excess of loss risk underwriters, we have a broad portfolio and are able to offer all kinds of hybrid solutions,” Anke points out. “We can offer XoL insurance, but we can also offer ground-up policies and put both together.”

Our excess-of-loss-specialised underwriters are based in the US, Northern Europe, and in the Germany-Austria-Switzerland region. They work closely with our other risk underwriting teams around the world. “We’re now looking forward to implementing XoL teams in other regions such as MMEA, APAC and South America to improve access to our excess of loss solution and be present were the business is,” says Anke.

Learn more about  excess of loss insurance from Allianz Trade.