What is an overline?
In the insurance sector, the term “over-line” refers to the part of an insurance company’s coverage that exceeds the normal amount of coverage it provides. Top-up coverage can arise when an insurer guarantees more policies than normal, or when a reinsurer accepts a larger amount of liabilities through a reinsurance contract than is typical for that business.
Key points to remember
- Excess coverage refers to the amount of insurance that exceeds an insurer’s normal capacity.
- This happens when an insurance company writes more policies than normal, including through reinsurance agreements.
- High top levels may attract the attention of state insurance regulators.
How Highlights Work
Insurance companies make money by collecting premiums in exchange for compensating their clients against certain risks. Of course, to insure these risks, insurance companies must ensure that they have sufficient financial capacity to do so. The quantity of ability an insurer depends on its financial strength and excess capital, or funds that are not currently used to cover policy liabilities. An insurer with excess capacity can write new policies, and thus bring in more premiums.
In addition to providing insurance to individual customers, insurance companies also insure each other through reinsurance contracts. For example, if insurer A has excess capacity, i.e. more money than it needs to cover its existing liabilities, it can use this capacity to sell insurance cover additional, for example by selling reinsurance to insurer B. Sometimes this may result in insurers covering a larger aggregate amount than is usually the case for their operations. This level of excess coverage is referred to as the company’s “top margin”.
State insurance regulators pay close attention to the amount of liability that insurance companies assume in their underwriting activities. Insurers are required to declare their financial situation to the State regulatorswho use these reports to determine if an insurer is in good financial health or if there is a risk of insolvency. For this reason, companies with significant levels of excess coverage could attract the attention of insurance regulators, who may question whether the insurer has assumed liability for an unsustainable level of risk.
Emma is the manager of an insurance company. Reviewing her company’s financial metrics, she notes that her company’s financial performance has been exceptionally strong over the past 12 months, resulting in excess cash reserves. It estimates that, if claims on its existing contracts proceed as projected, it will end up with approximately 20% excess capacity.
To deploy this capital and improve her bottom line, Emma decides to take out reinsurance contracts, accepting the risk held by other insurers in exchange for additional premiums. Although Emma believes her new contracts are likely to be both profitable and secure, the additional reinsurance contracts raise her company’s overall level of coverage above its historical average. Because of this, the new level of additional coverage may catch the attention of the state insurance regulator, requiring Emma to explain the change and demonstrate that the new policies are financially sound.