Over-Line

Allocated Loss Adjustment Expenses (ALAE)

WHAT IS AN OVER-LINE

Online insurance coverage exceeds the amount typically offered by an insurer or reinsurer. Online coverage can occur when an insurer takes out more policies than normal, or when a reinsurer accepts a larger amount of liabilities through a reinsurance treaty than it usually does.

OVER-Line DISTRIBUTION

Online coverage refers to the amount of insurance that exceeds the normal capacity of an insurer. This is important because insurers mainly earn money from their underwriting activities. In exchange for compensation from an insurance policyholder, the insurance company collects a premium and invests this premium in various assets in order to generate a profit. Investments tend to be low risk and relatively liquid, as the insurer must be sure to have access to funds if claims are made against their policies. The amount of liability that an insurer can assume is called its capacity.

An insurer’s capacity depends on its financial strength and excess capital, or on funds that are not currently used to cover policy liabilities. An insurer with excess capacity can take out new policies, and thus bring in more premiums.

Why Over-Line Matters

The capacity of an insurer generally remains relatively constant over time. An insurer may retain excess capacity to provide a larger cushion in the event of an increase in claims, or to be able to quickly enter a new market. In some cases, however, an insurer may purchase policies that increase its total liabilities above what it is generally willing to accept. This increase is considered excessive because it represents a level of capacity higher than normal.

Capacity also refers to the insurer’s ability to accept risk. For an individual insurer, the maximum amount of risk he can take out is based on his financial situation. The adequacy of an insurer’s capital in relation to its exposure to losses is also an important measure of the solvency or the ability of the insurer to meet its long-term financial obligations.

Insurance regulatory authorities pay particular attention to the amount of liability that insurance companies assume in connection with their underwriting activities. Insurers are required to report their financial condition to state regulatory authorities, which use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency. If a state determines that an insurer has exceeded the limit, it may encourage further consideration by regulatory authorities, as the insurer may take an unusual or unknown level of risk.

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