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 2026 catastrophe programme is built thus: 20 million excess of 10, then 50 excess of 30, then 120 excess of 80. The second layer costs 3.5 million, the third 2.4 million. What does that comparison say?
The same euro of premium buys far more limit at the top than in the middle, because the high layer is rarely reached
A layer's limit is the amount of cover it provides above its attachment point, and it is the second half of the conventional notation: a layer written ten excess of five million attaches at five and has a limit of ten, so it exhausts at fifteen. Reading those two numbers decides three things at once: the maximum recoverable on one event, the denominator of the rate on line and therefore how the price reads, and the capacity consumed as soon as a loss bites into the layer. In the example, the second layer offers 50 million for 3.5, a rate of seven percent; the third offers 120 million for 2.4, a rate of two percent. The same euro therefore buys roughly five times more limit at the top of the programme than in the middle, and the reason is neither a discount nor an anomaly: the probability of reaching a layer falls with height, and price follows that probability. This is what makes top capacity cheap and low capacity dear, a structural fact on which several later questions depend. A badly sized limit costs on both sides: too short, it leaves a gap between two layers; too long, it charges for height the catastrophe model never reaches.
Glossary entry · portee-de-tranche2. A mid sized cedant seeks 300 million of cover. Rather than one contract, it cuts the programme into six layers placed with twenty three reinsurers, six of whom appear on no other line. Which two problems does that cutting solve?
Appetite, which differs by height, and capacity, which no single reinsurer would supply
Layering cuts the cover sought into stacked, contiguous layers running from the cedant's retention to the top of the programme. Each layer carries its own attachment, limit, price and list of reinsurers, and behaves as a separate contract. The first problem it solves is price. Reinsurers do not share the same appetite by height: some are competitive on low layers, frequently hit, where experience suffices to price; others write only the top, where the rate on line is low and the diversification contribution strong. Cutting lets each be served where it is cheapest, which a single contract forbids since one price would have to cover incomparable exposures. The second problem is capacity, and is simpler: no single reinsurer would take two hundred million on a mid sized cedant. Layering splits the commitment once, and co reinsurance within each layer splits it again. The risk peculiar to this construction is the coverage gap, a discontinuity between the top of one layer and the attachment of the next, which stays invisible in practice until a loss falls exactly into it, and which reviewing the programme must rule out line by line.
Glossary entry · empilement-de-tranches3. In September 2022, Hurricane Ian produced around fifty billion dollars of insured losses in Florida. A regional carrier holding 30 million excess of 10, then 60 excess of 40, consumed ninety million of capacity in one week. Which figure now matters for the rest of the season?
Capacity still available layer by layer, not the programme's nominal amount
A layer is exhausted once the reinsurer's cumulative payments reach its limit. It then stops responding, and any later loss falls back on the cedant or on the layer above, depending on the structure. Exhaustion lifts only through reinstatement, where the contract provides one and usually against a premium; with no reinstatement available, the protection is gone for the rest of the period. The notion brings out a distinction everyday language erases, and that is the whole point of the question: a cedant announcing two hundred million of cover has it only while no layer has been touched. After a first event, the sole figure deciding its ability to face a second is the capacity still available, read layer by layer, not the programme's nominal amount. In the case described, the first two layers are consumed within a week; what remains is the top layer and a single reinstatement on the middle one, a structure quite unlike the one on the renewal sheet. It is exactly this gap between nominal and available capacity that surprised the market in multi event seasons, and why risk departments track exhaustion in real time rather than at year end.
Glossary entry · epuisement-de-tranche4. The Tohoku earthquake and tsunami of March 2011 produced around thirty five billion dollars of insured losses. A Japanese cedant whose programme topped out at eight hundred million saw every layer exhausted by that single event. What did the programme fail on, and which figure measures it?
On its height: the top compared with probable maximum loss, all the excess staying net
Vertical exhaustion describes how a single but very costly event cuts through a programme from the bottom up: it exhausts the first layer, bites into and exhausts the second, and stops somewhere above. It matters to see that the programme is then working exactly as designed, since it was built for a loss of a given return period. What is tested is not its mechanics but its height, and the figure that decides is the top of the programme against probable maximum loss. If the event exceeds the top, the cedant carries all the excess net, with no recourse and no clause able to help, since there is nothing above. Tohoku is the textbook case, far beyond the scenarios several Japanese programmes had assumed, and the market's answer read out at the following April renewals, where tower tops rose by thirty to sixty percent. The distinction from horizontal exhaustion is the heart of the subject and deserves holding firmly: there, several mid sized events consume the same low layer repeatedly, and the test bears on the number of reinstatements, not on height. The two modes call for opposite answers, which is why a programme well built for one can fail entirely on the other.
Glossary entry · epuisement-vertical5. In 2023 the United States counted more than twenty convective storms above one billion dollars, for some sixty billion of insured losses, with no major landfalling hurricane. Midwest insurers exhausted their single reinstatement low layer by June. What became of their high layers?
Paid for in full and never touched, the cedant absorbing net everything below their attachment
Horizontal exhaustion happens when one layer, usually the lowest, is hit several times in the year by separate events, until its reinstatements are used up. The cedant then has no front line and carries net every following event up to the attachment of the layer above, which stays intact, available and fully paid for. It is the most counterintuitive situation in the trade: the protection exists, it was bought, and it sits in the wrong place. No clause brings it down of its own accord, which is precisely why the clauses studied later exist. It is also the most common and least anticipated failure mode, because sizing attention almost always goes to the height of the programme. The problem it names is that of secondary perils, hail, flood, convective storm and wildfire, whose signature is repetition of mid sized events rather than one extreme, and 2023 gives the sharpest demonstration since the total was reached with no major hurricane at all. Three answers exist and they are not equivalent: buy more reinstatements, lower the attachment of the bottom layer, or add an aggregate cover that accumulates events instead of treating them one by one. Only the aggregate cover truly answers frequency; buying reinstatements or lowering the attachment merely pushes the threshold back.
Glossary entry · epuisement-horizontal6. A season strings together seven hail episodes costing 3, 11, 4, 9, 1.5, 14 and 6 million. None reaches a per event attachment of twenty million. Which structure answers that profile, and how does it count?
Aggregate excess of loss, which accumulates qualifying losses over the period before responding
Aggregate excess of loss accumulates over the period, usually the financial year, every loss meeting the contract's conditions, and responds only once that accumulation passes an annual aggregate deductible. It differs from two neighbouring forms often confused with it. Per event excess of loss compares each event taken alone with the attachment, and therefore never sees an accumulation of mid sized losses. Stop loss works on a loss ratio rather than an amount, which makes it protection of the income statement rather than of the catastrophe programme. A per loss filter, the qualifying deductible, usually keeps small losses out of the accumulation, so that the cover answers a build up of significant events rather than ordinary attritional experience: in the example, a two million filter removes the one and a half million episode, and the retained accumulation rests on the other six. The problem solved is exactly that of frequency, and its reach is worth measuring: a season stacking six or seven mid sized storms can cost more than one large event while finding no cover at all in the classical forms. That is what made the aggregate one of the most sought structures on secondary perils, whose losses grow by accumulation rather than by single peak.
Glossary entry · aggregate-exces-de-sinistre7. An aggregate cover carries two thresholds that must not be confused: a qualifying deductible per loss, and an annual aggregate deductible. What is each one's role?
The first filters which losses enter the accumulation, the second triggers the cover
The annual aggregate deductible is the level of accumulated losses a cedant must reach before the aggregate cover responds. It does over the year what the attachment point does over one event: while the sum of qualifying losses stays below it, the reinsurer owes nothing, and the first euro paid is paid on crossing the threshold. Telling it apart from the qualifying deductible is the particular difficulty of these contracts, and it holds in one sentence: one filters, the other triggers. Qualification decides which losses may enter the accumulation, the aggregate deductible decides at what accumulation the contract responds. Two thresholds alike in appearance, two functions that cannot stand in for one another, and a guaranteed dispute whenever drafting blends them. The problem the aggregate deductible solves is the sharing of frequency, and the reasoning is worth following: a cover paying from the first event would charge a premium close to expected losses, with no real transfer of risk, since the cedant would be funding through premium what it is about to receive. Setting the threshold above normal experience leaves the predictable part with the cedant and transfers only the deviation, which is the very definition of an efficient transfer. Its level is calibrated on the distribution of annual losses, generally between the median and the eightieth percentile.
Glossary entry · franchise-annuelle-agregee8. A clause automatically lowers a layer's attachment once the layers beneath it have been exhausted by an earlier event. What problem does it address, and why does it cost more than a fixed layer of the same limit?
Horizontal exhaustion: it puts capacity back at the bottom, and since its attachment can fall, it is reached more often
A cascading layer is one whose attachment falls automatically once the layers beneath have been exhausted by an earlier event. Instead of sitting inert above a hole, it comes down to occupy the vacated position and gives the cedant back a front line for the next event. The problem addressed is exactly the one described above: a cedant that has used up its low reinstatements stands bare at the bottom of its programme while having paid for high layers that will not serve. The protection exists but in the wrong place, and the cascade puts it back where the risk is. Its extra cost is not a commercial margin and explains itself in one line: the reinsurer accepts exposure whose attachment point may fall, hence a higher probability of being reached than a fixed layer of the same limit, and price follows that probability as it does everywhere else in a programme. It is found mostly on programmes exposed to frequency perils, and in markets where low layer capacity is scarce or dear, which is precisely where the additional reinstatement that would be the other answer costs most.
Glossary entry · tranche-cascade9. A cedant buys a sixty million layer excess of two hundred and forty, at a 1.1 percent rate on line, with a clause bringing it down to a fifteen million attachment for a second event. What is it actually buying, and on what condition does this work?
One capacity for two uses that cannot coexist, provided the first event does not reach the top
Top and drop is a variant of the cascade in which a layer placed at the top of the programme serves two successive functions. On the first event it plays its normal role of extreme protection, above everything else. If that event does not reach it, it drops for the second and takes up a low attachment, often that of the now exhausted first layer. The cedant therefore buys one capacity for two uses which, by construction, cannot occur together. The problem solved is budget efficiency, and the idea is elegant once seen: top capacity is the cheapest by rate on line, since it is rarely reached, but that is exactly why it is likeliest to go unused. Bringing it down as a second line converts dormant capacity into frequency protection, at a cost far below an extra reinstatement on the low layer, where each unit of limit costs several times more. The counterpart is the structure's own condition and must not be lost from view: a very large first event consumes the layer at the top, and then leaves it unavailable at the bottom. The cedant is protected against two mid sized events, or against one extreme event, but not against the two in succession.
Glossary entry · top-and-drop10. A cedant finds that a reinsurer carrying eighteen percent of a middle layer has gone into liquidation, opening a hole in its tower. What distinguishes the clause answering that situation from a plain cascade?
Its trigger: it also answers an abnormal disappearance, which makes it credit protection
A drop down clause provides that a layer's attachment falls in circumstances set by the contract, chiefly the exhaustion of an underlying cover or the failure of a reinsurer carrying it. It is that second trigger which separates it from the automatic cascade, and the distinction is more than a drafting nuance: the cascade answers normal consumption, the drop down also answers an abnormal disappearance, which makes it as much protection against credit risk as against frequency. The problem addressed is the hole in the tower, and its mechanics have to be seen to understand why it is serious. A programme whose middle layer is partly carried by an insolvent reinsurer shows a discontinuity nothing fills: the cedant goes on paying for the layer above without being able to reach it, since below it a capacity that was meant to lead there is missing. The drop down removes the discontinuity by sliding the upper layer into the vacated position. Two drafting points decide its real effectiveness, and neglecting them moves the dispute from substance to wording: what exactly counts as exhaustion of the underlying cover, and whether the drop comes with an additional premium or not.
Glossary entry · drop-down