Which is one form of reinsurance that provides both horizontal and vertical protection?

Question

Options

• Aper risk excess of loss
• Bper occurrence excess of loss
• Caggregate excess of loss
• DNone of the above

• A
  3% (1)
• B
  6% (2)
• C
  81% (26)
• D
  9% (3)

Explanation

Aggregate excess of loss (stop loss) is unique because it responds to both the accumulation of many losses over time (horizontal protection - frequency) and the total severity breaching a threshold (vertical protection - severity). It pays when the cedant's aggregate losses for a period exceed a set retention, regardless of how many events caused them.

Why the distractors are wrong:

• A (Per risk excess of loss) provides only vertical protection - it limits the cedant's exposure on a single large risk loss, but offers no protection against many smaller losses accumulating.
• B (Per occurrence excess of loss) also provides only vertical protection - it caps the cedant's loss from a single event/occurrence, but multiple separate events can still pile up without aggregate relief.

Memory tip: Think of the word "aggregate" as a hint - it pools all losses together, so it must protect against both their frequency (horizontal stacking) and their combined severity (vertical breach). If the protection requires more than one loss to trigger, it's working horizontally; if it limits total dollars paid, it's working vertically. Only aggregate XL does both.

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