How is under declared value applied in excess of loss reinsurance program?

In an Excess of Loss (XoL) reinsurance program, an “under-declared value” refers to a situation where the insurer reports a value that is lower than the actual exposure or the true value of the risk covered. This can affect how the program operates, particularly in terms of how the reinsurance coverage kicks in.

Here’s how under-declared values typically impact an Excess of Loss reinsurance program:

1. Reinsurance Coverage Trigger

In an Excess of Loss program, the reinsurer agrees to cover losses that exceed a specified threshold (known as the attachment point or retention) up to a certain limit. If the primary insurer under-declares the value of the risk, it could reduce the reported amount of losses, leading to the reinsurance coverage being triggered later or not at all.

2. Under-declaration of Exposed Limits

• If the insurer has under-declared the value, it might result in a lower attachment point than what would have applied had the true value been reported. This means the reinsurance protection may only kick in once the real (higher) losses occur, leaving the primary insurer more exposed.
• The reinsurer may be unaware that the real exposure is higher than what is reported and may not provide the intended reinsurance protection when needed.

3. Potential for Claims Disputes

• If the insurer under-declares the value and a claim is made, the reinsurer may dispute the claim, arguing that the value reported was incorrect and that they should not be liable for the excess loss.
• This can lead to delays or a reduction in the payout since the reinsurer may seek to limit liability based on the reported under-declared value.

4. Impact on Premiums

Reinsurance premiums are typically based on the declared value of the exposures. Under-declaring the value can lower the premiums charged by the reinsurer. However, if the true exposure exceeds the declared value, the primary insurer may face a shortfall in coverage when claims occur, leading to financial difficulties.

5. Reinsurer’s Risk Management

• Reinsurers often perform their own assessment of risks and can adjust the terms or pricing if they find discrepancies between the declared values and actual exposures. In some cases, they may require a review of the underwriting process to ensure that the risk has been adequately evaluated.

6. Adjustment Clauses

Some Excess of Loss reinsurance contracts may contain adjustment clauses that allow for the correction of under-declared values. If discovered that the declared values were lower than actual, the reinsurer may adjust the coverage and premium to align with the correct exposure.

7. Consequences for the Insured

If the under-declared value results in insufficient coverage under the Excess of Loss reinsurance, the insurer may face a situation where they need to bear more of the loss themselves, leading to significant financial strain. This could even affect the insurer’s solvency if large claims are incurred that exceed their retention.

Conclusion:

An under-declared value in an Excess of Loss reinsurance program can lead to coverage gaps, disputes with reinsurers, and potential financial instability for the primary insurer. It’s critical for insurers to accurately declare the value of risks to ensure proper reinsurance protection.

Kesimpulan:

Under-declared value atau Nilai Pertanggungan Kurang yang Disampaikan dalam program reasuransi XOL dapat menyebabkan kesenjangan luas jaminan, perselisihan dengan perusahaan reasuransi, dan potensi ketidakstabilan keuangan bagi perusahaan asuransi. Penting bagi perusahaan asuransi untuk secara akurat menyatakan nilai risiko guna memastikan perlindungan reasuransi yang tepat.