1880

Excess of loss (XL) treaties had been known since the 1880s but were not used widely. They became more popular in the US after World War I as a consequence of rising liability claims and natural catastrophes.

The excess of loss approach changed the nature of reinsurance business and increased the necessity for professional risk management. Unlike with earlier proportional contracts, XL treaties would only affect the reinsurer when losses exceeded a certain limit. This did not anymore reflect the overall loss situation and, seeing only peak losses, reinsurers lost touch with the overall risk exposure of their clients.

At first, reinsurers did not like this way of doing business. One contributor to the professional journal 'The Review' called XL a "hydra-headed monster". It was felt that the close relationship between reinsurer and client suffered as they did not share their fortunes. The old principle of reinsurance had been that reinsurers "follow the fortunes" of their clients, i.e. participated in all their losses and gains. Another problem was moral hazard. Clients might be tempted to care less about inspecting losses above a certain limit when they knew that this only affected the reinsurer. This threatened the often quoted "uberrima fides" principle.

The advantages of XL treaties were that they caused less administrative work and were cheaper to offer. Also, they helped avoid loss accumulations. XL treaties encouraged professional, i.e. actuarial risk management in that they forced reinsurers to look for alternative methods for the rating of risks.

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