Reinsurance layer
The band of loss between a retention and the retention plus a limit: the reinsurer pays the part of each loss that falls in that interval, and nothing below or above.
A layer is a band of loss between a retention and a ceiling. On 10 XS 5 M EUR, a 22 M EUR loss costs the reinsurer 10 M EUR and leaves 7 M EUR above it. At 1.5 M EUR of premium, the rate on line is 15% and the payback 6.7 years. A layer is written “limit XS retention”. 10 XS 5 M EUR pays, for each loss, the part between 5 and 15 M EUR, that is min(max(loss − 5, 0), 10). It is priced as a rate on line, premium divided by limit. The inverse is the payback, the number of loss-free years the reinsurer needs to recover a total loss of the layer. Because the layer only sees an interval, a shift in the retention or claims inflation changes how often it gets hit far more than the size of the losses themselves. Its annual capacity depends on the reinstatements written into the treaty. Low layers are priced on experience (burning cost), high ones on exposure or scenarios, and the capital they consume is measured through the VaR and TVaR of the layer's loss.
Example, layer 10 XS 5 M EUR, four losses in the year: 3, 7, 12 and 22 M EUR. The layer pays 0, 2, 7 and 10 M EUR, or 19 M EUR; the 22 M EUR loss goes through it and leaves 7 M EUR above, for the cedant or a higher layer. Those 19 M EUR exceed the 10 M EUR limit: the treaty needs at least one reinstatement for the layer to pay it all. With a premium of 1.5 M EUR, the rate on line is 1.5 / 10 = 15% and the payback 10 / 1.5 = 6.7 years.
reinsurance layer, layer, XL layer, excess layer
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.