Index clause

An index clause ties the attachment point, and sometimes the limit, of a non-proportional treaty to a price or wage index, so that the economic split negotiated between cedant and reinsurer holds over time. Without one, inflation mechanically erodes the retention in real terms: a retention set at one million euros protects a little less each year, and the reinsurer is handed a growing share of claims that have not actually worsened, with no matching premium. The problem is acute on long tail lines, general liability, motor bodily injury and construction, where twelve to fifteen years can separate occurrence from final settlement. The clause comes in three forms: full indexation, adjusting pro rata to the whole index drift; indexation with a franchise, applying only beyond a drift threshold, often ten or twenty percent; and capped indexation. It is the most technical negotiating point of a liability renewal, and the one whose financial effect both parties most often underestimate.

A motor bodily injury claim occurring in 2012 settles in 2026 for 4.2 million euros. The contractual retention was 1 million in 2012. With a full index clause on an index that has risen 38 percent over the period, the indexed retention becomes 1.38 million and the reinsurer's share falls from 3.2 to 2.82 million. Across a book of forty comparable claims, the difference is roughly 15 million euros.

Index clause, Clause d'indexation, Stability clause, Clause d'érosion monétaire, Severe inflation clause