how over lines work
insurance companies make money by collecting premiums in exchange for indemnifying their customers against certain risks of course in order to insure these risks insurance companies must ensure that they have sufficient financial capacity to do so the amount of capacity an insurer has depends on its financial strength and excess capital or funds not currently used to cover policy related liabilities an insurer with excess capacity can underwrite new policies and thus bring in more premiums in addition to providing insurance to individual customers insurance companies also provide insurance to one another through reinsurance contracts for example if insurer a has excess capacity that is more money than it needs in order to cover its existing liabilities it can use that capacity to sell additional insurance coverage such as by selling reinsurance to insurer b at times this can lead insurers to have covered a larger overall amount than is typical for their operations this excess level of coverage is referred to as the firm s over line state insurance regulators pay close attention to the amount of liability that insurance companies take on through their underwriting activities insurers are required to report their financial position to state regulators who use these reports to determine whether an insurer is in good financial health or if there is a risk of insolvency for this reason companies with significant levels of over line coverage might attract scrutiny from insurance regulators who may wonder whether the insurer has assumed responsibility for an unsustainable level of risk example of an over lineemma is the manager of an insurance company looking over her company s financial metrics she notes that her firm s financial performance has been unusually strong in the past 12 months leading to an excess of cash reserves she estimates that if the claims on her existing contracts play out in line with projections she will be left with roughly 20 excess capacity to deploy this capital and improve her bottom line emma decides to take on reinsurance contracts accepting the risk held by other insurers in exchange for additional premiums although emma believes that her new contracts are likely to be both profitable and safe the additional reinsurance contracts raise her firm s overall coverage level above its historical average for this reason it is possible that the new over line coverage level will attract the attention of the state insurance regulator requiring emma to explain the change and demonstrate that the new policies are financially sound 