What Is an Over-Line?
In the insurance industry, the term “over-line” refers to the portion of an insurance company’s coverage that exceeds the normal amount of coverage that they provide. Over-line coverage can occur when an insurer underwrites more policies than usual, or when a reinsurer accepts a larger amount of liabilities through a reinsurance contract than is typical.
Key Takeaways
- Over-line coverage refers to the amount of insurance that exceeds an insurer’s normal capacity.
- It occurs when an insurance company underwrites more policies than usual, including through reinsurance arrangements.
- Elevated over-line levels can attract scrutiny from state insurance regulators.
Understanding the Concept of Over-Lines
Insurance companies make money by collecting premiums in exchange for indemnifying their customers against certain risks. In order to insure these risks, insurance companies must ensure that they have sufficient financial capacity. This capacity depends on the insurer’s financial strength and excess capital, or funds not currently used to cover policy-related liabilities. An insurer with excess capacity can underwrite new policies and bring in more premiums.
Besides providing insurance to individual customers, insurance companies also provide insurance to one another through reinsurance contracts. For example, if Insurer A has excess capacity—more money than it needs to cover existing liabilities—it can use that capacity to sell additional insurance coverage, such as by selling reinsurance to Insurer B. This can lead insurers to cover more than typical for their operations, creating an over-line situation.
State insurance regulators closely monitor the liabilities insurance companies take on. Insurers report their financial positions to state regulators, assisting in assessing whether the insurer is in good health or if there is a risk of insolvency. Companies with significant over-line coverage levels might attract regulator scrutiny, needing to prove that new policies are financially sound.
Real-Life Example of an Over-Line
Emma is the manager of an insurance company. Observing her company’s metrics, she notes that financial performance has been remarkably strong in the past year, resulting in excess cash reserves. If the claims on existing contracts play out as projected, she estimates a 20% excess capacity.
To utilize this capital and boost her bottom line, Emma decides to undertake reinsurance contracts, accepting risks from other insurers in exchange for additional premiums. Although confident in the profitability and safety of these contracts, the additional reinsurance raises her firm’s overall coverage level above its historical average. This could draw attention from state regulators, requiring Emma to justify her strategies and prove the soundness of new policies.
Related Concepts in Insurance
What Is Excess and Surplus Lines Insurance?
Excess and surplus lines insurance, or E&S insurance, covers financial risks that aren’t typically covered by standard insurance companies. E&S insurance often includes high risk, complicated, or unusual risks and falls under property and casualty insurance. It can be purchased by individuals or companies.
What Is the Difference Between Allied Lines and All-risk Insurance?
Allied lines refer to property-casualty insurance connected to fire insurance, often combined with a standard fire policy to cover damage from events like tornadoes, windstorms, or water damage. All-risk insurance, also known as open peril insurance, encompasses a variety of risks not explicitly excluded in the policy.
What Is Homeowners Insurance?
Homeowners insurance is a form of property insurance covering damage to a residence, its furnishings, and other property within the home. It provides liability coverage for accidents occurring within the home or on the property.
Related Terms: Premiums, Indemnity, Financial Capacity, Reinsurance Contracts, Financial Regulations, Insurers, Insurance Companies, Solvency
