Catastrophe XL
Excess of loss reinsurance protecting the cedent against accumulated losses from a single catastrophic event across its portfolio.
What It Is
Catastrophe excess of loss (Cat XL) is a form of non-proportional reinsurance that protects a primary carrier against the accumulation of losses from a single catastrophic event, such as a hurricane, earthquake, or wildfire, that affects multiple policies simultaneously. The Cat XL treaty attaches above the carrier's net retention for any one event and provides coverage up to a specified limit.
Cat XL programs are typically structured in layers. A carrier might have a $100M Cat XL program structured as: $10M retention, then $15M xs $10M (first layer), $25M xs $25M (second layer), $25M xs $50M (third layer), and $25M xs $75M (top layer). Each layer may be placed with different reinsurers and priced at different rates-on-line, with higher layers generally costing less per dollar of coverage because they are less likely to be penetrated.
Cat XL pricing is heavily influenced by catastrophe models, and January 1 is the primary renewal date for most Cat XL treaties. The January 1 renewal season is a critical event that sets the tone for the primary insurance market throughout the year. When Cat XL costs increase at January 1, those increases flow through to policyholders over the following 12 months as primary policies renew.
Why It Matters for Brokers
The Cat XL market is the single most important driver of commercial property pricing in catastrophe-exposed areas. Brokers who track Cat XL renewal outcomes can anticipate the direction and magnitude of property rate changes for the coming year. Understanding Cat XL also explains why carriers restrict capacity in catastrophe-prone zones and why pricing varies dramatically by geography.
Real-World Example
At the January 1 renewal, a carrier's Cat XL program renewal shows a 25% rate increase across all layers. The program now costs $18M annually versus $14.4M the prior year, a $3.6M increase. The carrier writes $200M in property premium. To pass through the Cat XL increase, it needs a 1.8% rate increase just for reinsurance costs, before any other rate factors. Coastal accounts with higher cat model contributions see disproportionate increases of 5-12%.
Common Mistakes
- 1Not tracking January 1 Cat XL renewal results, which are the single best predictor of property rate direction for the coming year.
- 2Treating carrier rate increases as arbitrary when they often directly correspond to measurable increases in Cat XL costs.
How brokerageaudit.com Handles This
brokerageaudit.com incorporates January 1 and other major Cat XL renewal results into its market intelligence platform, providing brokers with data-driven context for property rate discussions with clients. The system projects the likely impact of Cat XL changes on specific accounts based on their geographic exposure.