XYZ Insurance Ltd wants to protect its fire insurance account against the impact of large one-off losses. What form of reinsurance should it purchase?

The appropriate choice for XYZ Insurance Ltd to protect its fire insurance account against the impact of large one-off losses is excess of loss reinsurance. This type of reinsurance is designed specifically to cover losses that exceed a predetermined limit, which is particularly beneficial for addressing the risk of catastrophic events that could lead to significant financial impact.

In this arrangement, once the claims exceed a certain threshold, the reinsurer is responsible for covering the excess losses. Therefore, if XYZ Insurance Ltd faces a large, unexpected fire loss, the excess of loss coverage will kick in, helping to absorb the financial burden of that event. This makes it an effective tool for managing risk and stabilizing the insurer’s financial performance in the face of potentially severe losses.

Other options, such as loss ratio coverage, quota share, and stop loss, serve different purposes. Loss ratio coverage is more focused on overall loss ratios rather than individual large losses. Quota share involves sharing a fixed percentage of premiums and losses with the reinsurer, which may not adequately protect against the severity of a one-off disaster. Stop loss reinsurance provides coverage once losses exceed a certain aggregate limit, but it does not specifically target individual catastrophic events the way excess of loss does. Therefore, for the specific need of shielding