In the traditional sense, the employment of funds for which a firm pays a fixed
cost or return. When revenues associated with the employment of these funds
exceed the fixed cost or returns, the firm is positively leveraged. Leverage as
used in the insurance and reinsurance industries has a similar meaning.
However, due to the unique nature of the insurance transaction, insurance and
reinsurance companies are able to take advantage of extreme leverage positions.
For example, an insurer's capital and surplus are usually only a fraction
of the total amount of insurance limits that it can comfortably sell to
insureds. This extreme position can only be sustained as long as the premiums
received and the investment income earned on loss reserves are adequate to
contain ultimate losses and expenses.