Index clause

Textbook case: a 2012 bodily injury motor loss settles in 2026 at 4.2 million euros, under a 1 million retention. With a full 38% indexation, the retention rises to 1.38 million, and the reinsurer's share falls from 3.2 to 2.82 million. An index clause ties the attachment point, and sometimes the limit, of a non-proportional treaty to a price or wage index. The economic split negotiated between cedant and reinsurer then 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 picks up, with no matching premium, a growing share of claims that have not actually worsened. 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 follows the whole index drift. Indexation with a franchise applies only beyond a drift threshold, often ten or twenty percent. The third is capped indexation. It is the most technical negotiating point of a liability renewal, and the one whose financial effect both parties most often underestimate.