An over-line is a term used to describe coverage on an insurance policy that exceeds the the amount that is typically underwritten for that particular type of policy.
Newly insured people would enjoy the increase coverage while existing and past clients would continue to be covered by the older lower coverage.
For example, the coverage capacity for a basic medical plan might typically be $100,000. But an insurer offers $150,000 which goes against it’s past offers.
A current insured individual might be tempted to terminate his or her current policy and sign up for the new one.
This is assuming the insurer allows this action.
Over-line occurrences are few and far between. But they can happen from time to time.
To understand why such situations arise, one has to understand that the capacity of an insurer depends on various factors including it’s financial strength.
Why overline occurs
An insurance company that has excess funds as a safety net and looking to gain market share from it’s competitors might find that it is in a strong position to grab market share. And thus, decides to go over-line with it’s offerings.
This excess capacity is a key factor that encourages insurers to offer over-line policies.
Leaving that capacity untouched would be an inefficient way to operate a profit-driven entity.
When we take this into consideration, it must also be noted that insurers calculate the coverage provided by their policies by taking into account their risks of claims, profitability, and cash flow etc.
This helps them to determine a fair, reasonable and competitive coverage to compete in the market consisting of various insurance companies.
This implies that when an insurer is observed to be offering over line products, it either indicates that it is desperate or in a very strong financial position.
Considering how prudent such organisations are with their financial activities, the latter is the more common scenario.
On top of that, offering such attractive policies can bring in cash quickly as customers pay premiums to sign up for policies, but claims in general would not come in until some time has passed.
This means that an insurer can quickly garner a strong cash position in the early phases of over-lining. Cash that can be used for other investments, or even just to earned interest on short-term time deposits.
However, they can get into tricky situations in the medium to long term as claims start to be filed by insured clients.
This is why over-line activities seldom last for an extended amount of time.
An exception is when competitor decide to compete with over-liners and the new higher coverage becomes a new normal for insurers.
Even so, unless there is a huge injection of funds into insurers, most should find it unsustainable.
Coverage amount would then revert back to where they were, or premiums start to rise to make up for the excessive coverage.
Because of the adverse implications linked to insurers who go over-line, regulators tend to keep a watchful eye on insurers who exhibit such behavior.
Even if there’s nothing internally wrong with an insurer, it does not bode well for the industry as a whole.
