Excess of loss reinsurance is a type of reinsurance in which the reinsurance company is responsible for covering any losses that exceed a certain amount incurred by the ceding insurance company. This type of reinsurance is designed to protect insurance companies from facing losses that they are not capable of dealing with.
Many insurance companies seek excess of loss reinsurance if they are worried that they may be assuming too much risk. In such situations, the excess of loss reinsurance protects them if their losses go above a certain amount. For example, if an insurance company purchases an excess of loss reinsurance policy with a loss limit of $1,000,000, and if the company sustains $1,500,000 in losses, then the reinsurance company will be responsible for reimbursing $500,000 of losses.
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