Drop down clause

A drop down clause provides that a layer's attachment point falls in circumstances set out in the contract, chiefly the exhaustion of an underlying cover or the failure of a reinsurer carrying it. It differs from automatic cascading in its trigger: cascading answers normal consumption, drop down also answers abnormal disappearance, which makes it as much a credit protection as a frequency protection. The problem it solves is a hole in the tower: a program whose middle layer is written by an insolvent reinsurer shows a discontinuity nothing fills, and the cedant then pays for the layer above without being able to reach it. Drop down removes that discontinuity by sliding the upper layer down. Drafting demands care on two points: what counts as exhaustion of the underlying cover, and whether the drop carries an additional premium, failing which the dispute simply moves from substance to wording.

After the liquidation of a reinsurer carrying 18 percent of a middle layer, a British cedant found a 5.4 million hole in its tower in 2026. Its upper layer carried a drop down clause for reinsurer default, triggered on the opening of insolvency proceedings: the attachment moved from 60 to 42 million against an additional premium of 340,000 euros. Cedants without the clause had to buy replacement capacity mid-year at market price.

Drop down, Clause drop down, Descente de tranche, Abaissement de priorité