What is the purpose of placing insurance in layers?

Placing insurance in layers serves the primary purpose of distributing risk among multiple insurers. This method allows for the sharing of large risks that may be too great for a single insurer to underwrite effectively. By dividing the total amount of coverage needed into smaller pieces or “layers,” insurers can take on portions of the risk according to their capacity and appetite. This arrangement is particularly beneficial for high-value or complex risks where individual insurers might otherwise face excessive exposure to loss.

Distributing risk in this manner not only protects the individual insurers from being overexposed but also ensures that policyholders can access higher total coverage limits than any single insurer might be willing to provide. The collaborative nature of layered insurance enables insurers to manage their resources better and maintain financial stability even in the event of a significant claim.