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In the traditional sense, leverage refers to the employment of funds for which a firm pays a fixed cost or return.

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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.