Captive Excess Reinsurance

In a typical stop loss captive structure, there are three layers:

Layer 1 – Employer Retention

The employer pays claims up to the specific deductible (e.g., $100,000).

Layer 2 – Captive Retention Layer

The captive assumes a defined layer (e.g., $100,000–$500,000).

Layer 3 – Excess Reinsurance

A commercial reinsurer assumes liability above the captive’s layer (e.g., $500,000 and above).

Excess reinsurance protects the captive from unlimited exposure.

Excess reinsurance responds only after losses exceed a specified attachment point.

Example:

• Employer retention: $100,000
• Captive layer: $100,000–$500,000
• Reinsurance layer: $500,000–$2,000,000

If a claim reaches $1.5M:

• Employer pays first $100,000
• Captive pays next $400,000
• Reinsurer pays remaining $1,000,000

Without excess reinsurance, the captive would bear the full catastrophic exposure.

A. Specific Excess Reinsurance

• Protects the captive against large individual claims above its retained layer.
• Most common structure in stop loss captives.

B. Aggregate Excess Reinsurance

• Protects the captive if total claims within the captive layer exceed a defined aggregate threshold.
• This prevents the captive from being destabilized by multiple mid-sized claims in the same year.

C. Quota Share Reinsurance

Instead of full excess, the reinsurer takes a fixed percentage of the captive’s layer.

Example:

• Captive retains 50%
• Reinsurer takes 50% of $100,000–$500,000 layer

This reduces captive volatility but also reduces profit potential.

1. Capital Protection

Captives must maintain regulatory capital.

One catastrophic claim without reinsurance could:

• Erode surplus
• Trigger capital calls
• Jeopardize licensing compliance

Excess reinsurance caps that risk.

2. Volatility Management

Medical claims are inherently volatile:

• Transplants
• Gene therapy
• Premature births
• Oncology

Excess reinsurance smooths loss swings and protects multi-year stability.

3. Credibility and Rating

Reinsurers are typically highly rated carriers.

Having strong reinsurance backing:

• Enhances financial credibility
• Protects members’ confidence
• Satisfies auditors and CFOs
• Supports regulatory compliance

4. Enables Lower Employer Deductibles

Without reinsurance, captives would need to retain extremely high deductibles to protect capital.

Excess reinsurance allows captives to:

• Offer lower working layers
• Maintain competitive pricing
• Balance risk and reward

If reinsurance is insufficient:

• One large claimant could exhaust captive surplus.
• Members could face capital assessments.
• Renewal pricing could spike.
• Captive viability could be threatened.

Reinsurance prevents single-year collapse.