Australian insurers are facing a world of rising risks, from bushfires to cyber-attacks. In 2025, excess of loss reinsurance has become a vital safety net, ensuring that even the worst-case scenarios don’t bring insurers – or their policyholders – to their knees.
Understanding Excess of Loss Reinsurance
Excess of loss reinsurance is a form of non-proportional reinsurance where a reinsurer covers losses above a specified threshold, or “retention”, for an insurer. Unlike quota share or surplus reinsurance, which share all claims proportionally, excess of loss only kicks in when losses exceed what the insurer can comfortably absorb.
- Retention: The amount the insurer covers before reinsurance responds (e.g., the first $10 million of claims).
- Limit: The maximum amount the reinsurer will pay above the retention.
For example, an insurer might purchase excess of loss coverage for catastrophe losses above $20 million, up to $100 million. If a single bushfire event results in $75 million in claims, the insurer pays the first $20 million, and the reinsurer covers the next $55 million.
Why Excess of Loss Is Booming in 2025
Australia’s insurance sector is under unprecedented pressure in 2025, with climate-related disasters and cyber incidents both on the rise. Key drivers for the popularity of excess of loss reinsurance include:
- Extreme Weather Events: The 2023-24 summer saw record insured losses from cyclones and flooding, pushing APRA to encourage robust reinsurance strategies.
- Regulatory Shifts: APRA’s 2025 update to Prudential Standard GPS 230 now requires insurers to demonstrate adequate catastrophe reinsurance, including excess of loss layers tailored to their risk profiles.
- Capital Management: With higher capital charges for catastrophic risk, excess of loss allows insurers to limit volatility and maintain solvency ratios without overcapitalising.
This shift is visible in the annual reports of major players. For instance, QBE’s 2025 risk disclosures show expanded excess of loss arrangements, particularly for Australian property and liability portfolios.
How Excess of Loss Supports Policyholder Protection
The real value of excess of loss reinsurance isn’t just for insurers – it’s for the everyday Australian policyholder. Here’s how:
- Faster Claims Payouts: Insurers with robust reinsurance can settle claims rapidly after disasters, without liquidity crunches.
- Premium Stability: By capping their losses, insurers reduce the need for steep premium hikes after major events.
- Market Stability: Excess of loss arrangements help prevent insurer failures, protecting the broader financial system and customer confidence.
In 2025, regional insurers in northern Queensland have leaned heavily on excess of loss to stay afloat after two consecutive cyclone seasons, ensuring continued coverage for local businesses and homeowners.
Key Considerations for Insurers and the Market
While excess of loss is invaluable, it comes with its own challenges:
- Pricing Pressures: Global reinsurers have increased rates for Australian catastrophe covers in 2025, driven by higher loss activity and tighter global capital.
- Retention Strategies: Insurers must balance higher retentions (to keep reinsurance affordable) against their own capital buffers and risk appetite.
- Coverage Gaps: Overly high retentions or limits can expose insurers to extreme tail risk, making actuarial modelling and stress testing critical under APRA’s new regime.
Looking ahead, the integration of AI-driven catastrophe modelling and real-time claims analytics is helping insurers negotiate more precise excess of loss terms, optimising both cost and coverage.
