CPI Policy Structures: Proportional vs Excess of Loss | Audley

Overview of CPI Policy Structures

The structural choices made when binding a capital protection policy materially affect how risk is shared, what premium the insurer demands, and how recoveries flow when a trigger event occurs.

Proportional Covers

Under a proportional arrangement, the insurer shares in a fixed percentage of every pound of capital at risk from policy inception. If the funder commits £5m and takes 50% proportional cover, the insurer is on risk for £2.5m and the funder retains £2.5m of net exposure.

Proportional covers suit funders who want predictable risk sharing across a portfolio and who are willing to share upside (in some structures, premium is partially contingent on recoveries) in exchange for symmetrical loss participation.

Excess of Loss Covers

Excess of loss (XoL) covers operate above a defined retention. The funder absorbs the first-loss layer; the insurer only responds once losses exceed that retention. This structure is well-suited to funders with strong portfolio-level diversification who want catastrophic-loss protection on individual cases without paying for first-pound cover.

First-loss retention is typically expressed as a percentage of committed capital (e.g., 20%) or as an absolute monetary amount. Higher retentions reduce premium but increase the funder's exposure to attritional losses.

Trigger Events

The policy responds on the occurrence of a defined trigger event, typically one or more of:

• A final adverse judgment or arbitral award against the funded party
• A negotiated settlement that yields a recovery below the total capital deployed by the funder
• Claimant insolvency during proceedings where recovery prospects are extinguished
• Discontinuance of proceedings on terms that produce no recovery for the funder

Common Exclusions

• Cases abandoned without a court or tribunal determination
• Losses where the funder has caused or contributed to the adverse outcome
• Material misrepresentation by the insured at policy inception
• Fraud, criminal conduct, or sanctions-related exclusions
• Changes to the funded case strategy made without insurer consent (in many policies)

Indemnity Limits & Coverage Basis

Policies are written on either a sum insured basis (covering up to a fixed maximum) or an agreed value basis (covering the full committed capital at the time of loss, subject to retention). Most institutional funders prefer agreed-value policies because long-running disputes often see capital commitments escalate beyond original budgets.

Capital protection insurance covers capital deployed, not anticipated returns. If a funder's total capital at risk is £3m but its contracted return at a 3x multiple would be £9m, the policy typically covers only the £3m — not the forgone profit.

Conclusion

Choosing between proportional and excess-of-loss structures — and calibrating retentions, exclusions and the indemnity basis — is a portfolio-level decision that should be made in tandem with the funder's wider risk framework. For tailored advice on structuring CPI cover, submit an enquiry or contact our team.