Every answer and its explanation appears here once you have finished the path. Each one then links to the matching glossary entry, where the concept is set out in full with its worked example.
1. A layer is written "10 XS 5 M EUR". A loss costs 12 million. How does it split?
5 million to the cedant, 7 million to the layer
The notation states a limit above an attachment point: 10 million of cover above 5 million of retention. The reinsurer therefore covers the slice between 5 and 15 million. Below 5 the cedant keeps everything; above 15 the loss exceeds the layer and falls either on a higher layer or back on the cedant. A 12 million loss thus leaves 5 million to the retention and puts 7 million into the layer. The option that leaves 2 million uncovered reproduces the most common error, treating the limit as though it were exhausted at the same time as the retention. It is this stacking of slices that lets several reinsurers cover different parts of one risk, and that gives a program its cost.
Glossary entry →2. Why can a high catastrophe layer not be priced on burning cost, the way the low layer just above the retention is?
Because history is too thin at those levels, which forces catastrophe modeling and scenario analysis
The working layer is regularly hit by attritional losses: data is abundant, burning cost works, and the rate on line is high because the reinsurer pays often. The catastrophe layer is rarely reached and meant for high severity events: history is not enough at those levels, pricing goes through catastrophe modeling and scenarios, and the rate on line is low. Its role is prudential rather than economic, since it is what protects the cedant's solvency against a major shock. Knowing where a slice sits therefore decides the method, the volatility and the function. In cyber the boundary blurs: accumulation can turn attritional frequency into a peak event, which neither method anticipates on its own.
Glossary entry →3. An hours clause groups into a single occurrence the damage arising within a window of 72 hours for a hurricane, 168 for other perils. What does it produce when applied to a software compromise introduced on one day, dormant for months, then activated in waves?
It applies a notion of occurrence to a peril that has no natural one, and the cut becomes arbitrary
The hours clause works because a hurricane has a beginning, an end and a name: grouping damage inside a window then reflects something real. A software compromise has none of that. Introduced on one date, dormant for months, activated in waves, it makes it impossible to say which day the event took place, so the window chosen decides the number of occurrences, and therefore the number of retentions and of limits consumed. That choice is not technical but economic, and it is made before the loss. Cyber catastrophe bonds are nevertheless issued on a per-occurrence basis, which imports the same difficulty into the capital markets.
Glossary entry →4. A cedant settles a complex claim in good faith after analysis. On what ground can the reinsurer refuse to bear its share?
By showing that the settlement manifestly fell outside the treaty's cover, or that there was manifest fault or collusion
The follow clause obliges the reinsurer to share the cedant's fortune and to accept decisions and settlements made in good faith and reasonably, without reopening each file. That is the logical counterpart of a relationship in which it does not control claims handling, left to the cedant who is in contact with the insured. Without it, every claim would become a negotiation and reinsurance would lose its fluidity. But it is not absolute: the reinsurer follows only settlements that actually fall within the treaty's cover and were made without manifest fault or collusion. The exact boundary, between a reasonable settlement and a liberality the reinsurer need not fund, feeds an abundant case law and remains a classic field of dispute.
Glossary entry →5. Under an LMA 5630 cyber treaty clause, the reinsurer may follow the direct policy's war and cyber operation exclusion if that policy is Type 3 compliant. The cedant migrates to a non-compliant variant with a widened write-back. What happens?
The Difference in Conditions provision stops applying, and the reinsurer relies on its own standalone exclusion
The Difference in Conditions provision is not a follow clause. A follow clause aligns the reinsurer automatically on the direct settlement; Difference in Conditions aligns it only if the direct clause meets a conformity standard set in advance, here Type 3 in the Lloyd's Y5381 classification. For the reinsurer it is a double safeguard: its own exclusion applies by default, and the underlying's conformity merely opens the possibility of a closer alignment. For the cedant it is underwriting discipline: any drift of the direct clause outside the standard removes the benefit of alignment, and a gap then opens between what the direct policy covers and what the treaty follows. That gap stays with the cedant, and it appears without any renegotiation having taken place.
Glossary entry →6. One risk is retroceded several times inside a small circle of reinsurers. Why should that operation not relieve capital requirements the way a cession to an outside third party would?
Because a risk circulating in a closed circle is not transferred but recycled, and accumulates at the circle's nodes
Each participant believes it has transferred part of its exposure while having kept it by a roundabout path, so the same risk can come back to strike its original carrier several times. The London market learned this at the turn of the 1990s. And the gravest consequence is informational: once the retrocessions are unwound, nobody has a consolidated view of who actually carries what, which makes the exposure unmeasurable, even after the fact. A cession that leaves the circle disperses; a cession that stays inside it concentrates while wearing the appearance of dispersion, and it is that appearance which misleads the capital calculation.
Glossary entry →7. A local insurer issues a policy then cedes the entire risk to a group's captive, against a commission. The reinsurer defaults. What does the fronting carrier owe?
The whole claim, since it remains legally liable to the insured
Fronting is a regulatory interface: a locally licensed insurer issues the policy and formally carries the liability toward the insured, while ceding most or all of the risk to a reinsurer or a captive that lacks the required license. It lends its license and its signature against a fronting commission. The arrangement answers a real need, housing a group's risks in its own captive while meeting local insurance obligations. But credit risk is its core: the fronting carrier stays bound to the insured and must pay the claim even if the reinsurer defaults. This is why the reinsurer's solvency and the quality of the collateral the fronting carrier takes make the whole safety of the operation, and why regulators watch it.
Glossary entry →8. In a loss portfolio transfer, the cedant transfers claims that have already occurred, together with the reserves attached to them. What exactly does the reinsurer buy?
Development risk, that is, the possibility those claims finally cost more than reserved
Unlike classic reinsurance, which covers future and uncertain claims, a portfolio transfer bears on past commitments whose remaining uncertainty lies in their development. By ceding that risk, the cedant stabilizes its result, frees the capital immobilized to carry those reserves, and closes an inherited exposure. It is the central tool for managing legacy portfolios and run-off situations. A close variant, adverse development cover, does not transfer the portfolio but protects the cedant against reserves being exceeded beyond a threshold. On long-tail lines, and in time on cyber, these operations are one of the few ways to bound uncertainty on the ultimate cost of old claims.
Glossary entry →9. An insurer stops writing a loss-making line and negotiates the transfer of the liability. A legacy specialist buys the reserves for 85 million euros, against an internal estimate of 80 million. Why does the cedant agree to pay more than its own estimate?
Because it is buying the end of uncertainty and the release of immobilized capital, and that has a price
A run-off portfolio keeps settling claims for years, sometimes decades on long-tail lines, and its central risk is reserving: underestimating future claims turns an apparently profitable operation into a loss, especially on late claims and lines prone to drift. The cedant carries that uncertainty, and the capital that goes with it. The five million difference is therefore not a pricing error, it is the price of certainty: a cost fixed today against a cost left open tomorrow. The specialist takes the opposite bet, that its command of run-off will let it settle below the reserves received. Both can be right, and that is exactly why this market exists.
Glossary entry →