What role does "excess insurance" play in an insurance portfolio?

Excess insurance plays a crucial role in an insurance portfolio by providing coverage for costs that exceed the limits of standard insurance policies. This type of insurance acts as a safety net, kicking in when the primary insurance coverage has been exhausted. For example, if a policyholder has a liability insurance policy with a limit of $1 million and faces a claim resulting in damages of $1.5 million, the excess insurance would cover the additional $500,000 beyond the primary policy's limit.

Having excess insurance is particularly important for businesses or individuals at risk of liabilities or significant losses that could surpass their basic coverage limits. This additional layer of protection helps ensure that policyholders are not left vulnerable to large financial losses that exceed their primary coverage, enhancing overall financial security and risk management in their insurance strategy.