Massachusetts State Life Insurance Practice Exam

Excess-of-loss reinsurance is a type of reinsurance agreement that specifically protects the ceding insurer against losses that exceed a predetermined amount, known as the retention limit or attachment point. This means that the reinsurer is only responsible for covering claims above this specified threshold. The primary purpose of this arrangement is to enable insurers to stabilize their financials by mitigating the impact of unusually high losses. By doing so, they can manage risk more effectively and maintain solvency in the face of significant claims.

Understanding the context of the other options helps clarify why this choice is the best definition. The first option suggests a method that covers all standard claims, which does not accurately represent excess-of-loss reinsurance since it specifically pertains to losses that exceed a certain limit, not all claims. The second option regarding unlimited liability does not apply to excess-of-loss reinsurance, as reinsurers only cover losses beyond a set amount, thus capping their risk exposure. The last option about profit-sharing is also misleading because excess-of-loss reinsurance focuses on loss coverage, rather than sharing profits from the insurance operations.