What is the main purpose of aggregate excess of loss reinsurance?

The primary purpose of aggregate excess of loss reinsurance is to protect an insurer from the financial impact of total losses that exceed a specified threshold over a defined period. This type of reinsurance activates when the cumulative losses from multiple claims surpass a predetermined limit, effectively shielding the insurer from extreme loss scenarios that could otherwise threaten their solvency and stability.

By utilizing this reinsurance, insurers can manage their overall risk exposure, ensuring they have the financial means to cover significant loss events. It allows them to smooth out fluctuations in their loss experience, providing a safety net during unexpected catastrophic events or when there is a spike in claims.

This mechanism also aids insurers in adhering to statutory capital requirements, as it helps stabilize their financial position in times of unusually high claims. Thus, it serves as a crucial tool in an insurer's risk management strategy, particularly in industries susceptible to sporadic large losses.