Gross line refers to the maximum amount of coverage an insurance company will provide for a given risk. Liability incurred as a result of the claim cannot exceed the gross line. This can be particularly important for reinsurance contracts, where firms share some of the risk with another insurance company to manage their underwriting liabilities. In this process, called ceding, the company passes some liability to a partner under a reinsurance contract. If the policyholder files a claim, the insurance company can turn to the reinsurer for partial coverage.
Underwriters conduct careful research to determine how much coverage to offer. The goal is to provide adequate coverage for the asset so that the policyholder can afford to replace it with an identical or similar asset. If the policy is not large enough, this can pose problems when a claim is filed, and if it’s too large, the insurance company takes on more risk than it needs to. On the policy, the gross line is a reflection of how much the company is willing to insure the asset for in a given situation.
This is a combination of the net and reinsurance lines, in the case of a policy that has been reinsured. The net line explains how much liability the insurance company is choosing to retain, such as a percentage or certain amount, depending on the terms of the contract. Under the reinsurance line, the policy has information about how much risk is undertaken under contract with another insurer or a collective. For example, earthquake insurance is often reinsured with government-sponsored collectives because the potential liability would be too high for individual firms.
It is important to make sure a policy is updated to reflect changes in asset value. The cost of the policy will increase if values rise, but by the same token, so will the amount of coverage. If an asset like a home is not adequately insured, an event like a fire or flood could be devastating for the owners, who might not be able to rebuild or buy a new home on the payout from a policy based on an outdated value. Policyholders with questions about the gross line can discuss them with the company and may want to ask how the firm arrived at a value estimate.
Firms agreeing to offer reinsurance also want to know about the gross line. They need to know the total liabilities they are taking on with a policy, and also want to be aware of the amount of risk taken on by the original company. Insurers use reinsurance to distribute risk, make it possible to offer more coverage, or get out of certain areas of the market. An awareness of the context can be important for reinsurers to know about.