What Does Attachment Point Mean?
An attachment point is a concept used in the context of reinsurance. It is the amount that a ceding company will pay for a risk. Once the loss exceeds this amount, the reinsurer will step in and pay for the excess.
Put another way, it is the coverage threshold. It is the point at which excess insurance (or reinsurance) would kick in. If the retention on a reinsurance policy is $500,000, then $500,000 is the “attachment point” and any losses beyond that would be covered by the reinsurance treaty (written as an excess of loss treaty). Any amounts below this attachment point would be paid for by the primary insurance company.
Although most commonly used in the reinsurance context, it can also be used for insureds who purchase supplemental, excess, or umbrella insurance policies that are meant to pay losses once the limits on their primary insurance policies have been reached.
Insuranceopedia Explains Attachment Point
Most states regulate insurance companies to ensure that they are doing business for the benefit of the public and to ensure their financial stability. Part of the drive to ensure financial stability to insurers operating in their state includes setting an attachment point for policies written in that state.
The attachment point is the amount that an insurance company will pay for a risk, as stipulated by state regulation. The state insurance commissioner sets the amount to make sure that the company is financially capable of covering the risk.
For example, if the attachment point of a risk is $100,000, then the insurer cannot promise coverage for a loss beyond that amount. To abide by state regulations, the insurer would have to turn over the excess to reinsurers. This prevents insurers from taking on liabilities for a loss that is greater than their ability to pay from their liquid capital reserves, thereby jeopardizing their financial stability.
Sometimes, this is also referred to as a stop-loss or aggregate stop-loss.
In a general insurance context (that is, outside of reinsurance specifically,) the attachment point is also the threshold at which supplemental or excess coverage policies kick in to make up for any shortfalls in the primary policy.