---
title: "✅ What is a vertical cover? | Reinsurance tutorials #8 • The Basics"
description: Understand what is a vertical cover - easily explained with a video. 📌These tutorials will offer you all the basics you need to master reinsurance
---

[Insurance & Reinsurance market | Arundo Re's blog](https://blog.arundore.com/en)

# [✅ What is a vertical cover? | Reinsurance tutorials #8 • The Basics](https://blog.arundore.com/en/what-is-a-vertical-cover)

 Written by [Patrick Delalleau](https://blog.arundore.com/en/author/patrick-delalleau) | Nov 3, 2020, 6:00:00 AM

## Reinsurance tutorials #8 • The Basics

## What is a vertical cover?

Non Proportional reinsurance is an alternative to Proportional reinsurance to protect against:

- big individual risk losses and/or huge CAT events involving many risks, the vertical covers called **Excess of Loss contracts (XL)** 
- increased loss frequency putting at risk your retention and balance sheet on one or several Lines of Business. These are the horizontal covers called Stop Loss and aggregates 

## How do vertical covers work?

**The criteria** used is the size of the **loss** you, as an insurer, can sustain on one risk or one event damaging many risks, not the **sums insured**. The company fixes an amount whereby it keeps 100% of the loss below that priority or excess point and cedes 100% of the loss above the XL.

Let’s take an example to differentiate PPP and NP. Suppose:

- A gross capacity of 10 million, a retention of 1 million, a risk of 10 million and a 500,000 loss.
- If a proportional treaty gives a capacity of 9 million or 90% of the risk, you pay 90% of the premium. For a 500,000 loss on that risk, the proportional reinsurer will pay 90% of the loss, i.e.:  450,000. 
- An Excess of Loss contract gives you a capacity of 9 million in one or several layers (for example 4XL 1, then 5 XL 5). His price will only be a certain % of your premium, but where a 500,000 loss is under the priority line, the XL reinsurer will not pay anything.

 

**Advantages/Disadvantages**

- RISK XL: The Insurer is protected against peaks for a smaller amount of Gross Premium (bearing in mind that for proportional contracts the actual balance/cash you cede is after commission).
- The underwriting quality of the risks and their pricing is usually less detailed than with a proportional contract.
- CAT XL (Nat Cat): will provide you with a bigger capacity than a proportional treaty.
- CAT XL: protects against the accumulations of losses. The contract (wording) needs a clear **event definition**: what is covered, **hour clauses** telling how long you can accumulate the losses. This requires hard work and can bring about much conflict.
- CAT XLs are also used to cover against unknown accumulations (marine cargo, motor damages, personal travel accident, fire conflagration…).
- Proportional means partnership, the volatility of the reinsurance price and of the capacity offered will be much less than on NP which is a security for your budget and business plan. **Price** may look higher than NP, although it depends on the years, books, etc. 

**NP PRICE**: a fixed % (sometimes a variable one on frequency layers) of the premium income of the protected book (the Subject Premium Income). It will depend on: 

- The level of the excess point, a low level means a big probability for the XL to be affected, one or several times, if the insurer has asked the cover to be reinstated after the occurrence of a first loss, the higher the price.
- The exposure of the XL: how many risks may impact the programme.
- The claims experience over the past years.
- The probability estimated for future occurrences, the return period calculated for CAT.

The state of the market competition: soft, hardening or scarce.

 

 

 

 

## 📺 More episodes to come... Subscribe now to receive them in advance before their public release! 📥

 

[View full post](https://blog.arundore.com/en/what-is-a-vertical-cover)

```json
{
  "@context" : "http://schema.org",
  "@type" : "BlogPosting",
  "author" : {
    "@type" : "Person",
    "name" : "Patrick Delalleau"
  },
  "dateModified" : "2020-11-03T06:00:00.608Z",
  "datePublished" : "2020-11-03T06:00:00Z",
  "headline" : "What is a vertical cover?",
  "image" : {
    "@type" : "ImageObject",
    "height" : 1080,
    "url" : "https://f.hubspotusercontent30.net/hubfs/6458234/Vignette%20vertical%20cover%20LN-1.jpg",
    "width" : 2063
  },
  "mainEntityOfPage" : "https://blog.arundore.com/en/what-is-a-vertical-cover",
  "publisher" : {
    "@type" : "Organization",
    "logo" : {
      "@type" : "ImageObject",
      "height" : 60,
      "url" : "/hs/hsstatic/content_shared_assets/static-1.4092/img/default-amp-logo.png",
      "width" : 60
    },
    "name" : "The reinsurance and insurance blog of Arundo Re"
  }
}
```