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. What decisive advantage does rate on line have over every other measure of a layer?
It depends on no assumption: it is read off the placement itself, where a burning cost requires corrections and a model requires scenarios
It is the figure the market quotes because it is a fact and not an estimate: a premium divided by a limit, both written in the contract. The three other answers credit it with qualities it lacks, and two of them are exactly what the rest of the module corrects. It incorporates no cost of capital, which is precisely what payback is missing. It does not account for reinstatements, which is why the premium is sometimes compared to the mobilizable limit rather than the nominal one. Comparison across lines is possible and fragile, for the same reason as any comparison by this number.
Glossary entry →2. Payback is the inverse of rate on line and reads as a number of years. What is it not?
A return period: it accounts neither for expenses, nor brokerage, nor cost of capital, nor investment income, nor above all the real probability the layer is hit. It is a division, not a result
The shortcut is convenient because it turns an abstract percentage into a duration everyone can picture, and that comfort is what makes people forget what it leaves out. A reinsurer pricing on payback alone would be working without knowing whether it makes money. The answer on comparability is factually wrong, payback comparing well across programs and being used for exactly that. The one on solvency changes the subject. The one on the treaty's lifetime confuses an economic quantity with a contractual duration of one year.
Glossary entry →3. In a program, one layer shows a rate on line far from what its rank would suggest. What should be made of it?
Treat it as a signal: a marked gap almost always reveals something, an exclusion, a missing reinstatement, or a misunderstood exposure
Reading a program's rates on line side by side immediately gives its shape, and that shape is what makes an anomaly visible: the number does not say what is wrong, it says to go and look. The answer realigning the rate confuses the thermometer with the fever, and erases the signal. The one accepting everything treats the independence of placements as a reason not to compare, when comparison is precisely what this measure is for. The one requiring a gap to the burning cost asks for an estimate where the whole point of the measure is to require none.
Glossary entry →4. One layer at thirty-two percent rate on line offers three free reinstatements, another at 2.8 percent offers none. How can they be compared fairly?
By relating the premium to the total mobilizable limit over the year rather than the nominal limit: four times the limit for the first brings its rate to eight percent, and the comparison reverses
A layer with several free reinstatements does not commit the same annual limit as one without, and without that correction the first looks expensive and the second cheap for no reason. The answer removing the reinstatement share from the premium requires knowing a price the contract does not separate. The one relying on payback changes the unit without changing the content, the inverse of a wrong ratio staying wrong. The one referring to burning costs brings an estimate back into a comparison whose value is that it is factual.
Glossary entry →5. A model returns a price giving a hundred-year payback on a working layer. What should be concluded?
That the model is wrong, and that is exactly the service expected from this measure: pricing is done elsewhere, and rate on line checks the coherence of the result
A working layer is hit often, by definition, and a hundred-year payback says it would almost never be: the two statements cannot hold together, and observation prevails over the model. The right use of these two quantities is as a control instrument, never a pricing one. The answer raising the priority changes the risk to save the price. The one blaming the market inverts the hierarchy of evidence between a fact and an estimate. The one reclassifying the layer takes the price for the nature, when the nature is read in the observed frequency.
Glossary entry →