The excess-of-loss reinsurance benefits for small insurers

Abstract

This paper analyzes profitability and risk effects of the excess-of-loss (EoL) reinsurance coverage for a small insurer. Under the risk-based capital (RBC) standards, the small insurer with EoL reinsurance is more profitable and has smaller standard deviation. Therefore, the limited supply of EoL reinsurance can adversely affect the profitability and competitiveness of small insurers, especially after major catastrophes. Insurance regulators can mitigate this problem by establishing a residual reinsurance market where small insurers can obtain reinsurance.