DEFINITION of 'Manual Excess'

In insurance, manual excess refers to the premium charged for carrying insurance coverage above the liability limit of the policy. Manual excess rates are determined based on the risk factors associated with the coverage, such as the type of liability being covered and the estimated severity and frequency of losses.

BREAKING DOWN 'Manual Excess'

Manual excess insurance is a form of temporary excess limit insurance – not unlike overdraft protection on a bank checking account.

A company purchases insurance policies to cover against risks and perils that it has identified. While a company may purchase a policy with a large aggregate limit on its coverage, this can be expensive, prompting the company to only purchase the amount of coverage that it really needs in the usual course of operations and buisness activites.

For many companies, most of the time the amount of coverage purchased is enough. But situations may arise in which the company reinsures, but incurs damages or losses before the policy period takes effect. Some risks that a policyholder insures against may reduce the difference between the coverage limit outlined in the policy and the average risk; this can lead to a situation in which the insured will run up against the limit, or may exhaust the aggregate coverage limit entirely. If the limit is exhausted the insured will be responsible for all claims until the limit is reset, which carries great risk if the insured experiences a severe claim. The insured may want to increase the aggregate limit for the amount of time remaining on the policy, and the insurer may offer an increased limit for an additional premium.

Insurance companies determine what to charge for additional coverage limits by examining the risk factors associated with the policy type. The data is developed in table format to determine the additional charge that should be made to address the exposure of the higher limit. Multiplying the manual rate by rate factors found in the table establishes the size of the premium, and the coverage terms. The portion of the additional premium that is charged above and beyond the basic or manual rate is called the manual excess.

The additional limits and coverage only apply until the end of the policy period, and the excess aggregate limit applies after the date that the additional limit was purchased.

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