What is 'Large-Line Capacity Insurance'

Large-line capacity insurance is a single policy that covers a potential for a large amount of loss. Often it is the maximum amount of liability an insurer can assume in a single policy. Large-line capacity is also insurance coverage that protects an insurer's ability to underwrite a large amount of risk under a single policy.

BREAKING DOWN 'Large-Line Capacity Insurance'

Underwritten policies are most commonly for relatively small amounts of risk. For example, homeowners’ insurance thresholds typically do not exceed several million dollars. Sometimes, however, an insurer may provide large-line coverage for a single policy. Underwriting more substantial policies introduce a different set of risks than do smaller policies.

When underwriting a new policy, the insurer agrees to indemnify the policyholder from a specific peril in exchange for a premium. An insurer's capacity is the maximum amount of liabilities it can assume through underwriting activities. Underwriting increases liabilities and reduces capacity. Once the insurer reaches its maximum capacity, it is prohibited from underwriting new policies.

State insurance regulators limit the number of large-line policies that an insurance company may underwrite. These limits are warranted because infrequent but severe events, such as catastrophic floods or hurricanes, are more likely to lead to insolvency when the majority of an insurer's policies are large-line policies. The maximum amount of large-line coverage that an insurer underwrites is typically calculated as a percent of the insurer’s surplus.

Reducing Large-Line Capacity Risk with Reinsurance

One way an insurer can reduce capacity is through reinsurance. In a reinsurance contract, the insurer cedes a portion of its liabilities to a reinsurer. The reinsurer accepts the risk in exchange for a share of the premiums collected on the policies. The type of reinsurance contract that an insurer pursues depends on its large-line capacity policy. A facultative reinsurance contract allows the insurer to cede a particular risk, like that associated with a large-line policy. Facultative reinsurance is a more transactional approach since it does not require the reinsurer to accept additional risks as it would with treaty reinsurance.

The facultative reinsurance contract may be proportional or non-proportional. In a proportional reinsurance contract, the insurer and reinsurer share both the premium and risk of loss according to a predefined ratio. In a non-proportional contract, the insurer retains a portion of both the liability and risk and the reinsurer covers losses, up to a limit, that exceeds what the insurer has.

RELATED TERMS
  1. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  2. Underwriting Capacity

    Underwriting capacity is the maximum liability that an insurance ...
  3. Gross Line

    The maximum amount of coverage an insurer is willing to underwrite ...
  4. Reinsurer

    A reinsurer is a company that provides financial protection to ...
  5. Shortfall Cover

    A reinsurance agreement used to temporarily reduce gaps in an ...
  6. Spot Reinsurance

    A reinsurance agreement that covers a single peril.
Related Articles
  1. Insurance

    The Business Model of Reinsurance Companies

    Learn about the business of reinsurance, a hidden industry that underpins the entire financial and insurance structure around the globe.
  2. Insurance

    Insurance, Excess Insurance and Reinsurance: What's the Difference? (ALL)

    Understanding the differences might help you avoid being overinsured or underinsured.
  3. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  4. Insurance

    How Does Reinsurance Work?

    Reinsurance is a practice in which insurers transfer portions of portfolios to other parties in order to reduce their exposure to claims.
  5. Insurance

    Understanding your insurance contract

    Learn how to read one of the most important documents you own: your insurance contract.
  6. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  7. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  8. Insurance

    Do You Need Casualty Insurance?

    Find out how different types of coverages can protect you and which policy is right for you.
  9. Insurance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  10. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
RELATED FAQS
  1. Can your insurance company cancel your policy without notice?

    Learn about your rights as an insured when it comes to your insurance policy being canceled, including how to access your ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center