Drop down clause
A provision that lowers a layer's attachment point when an underlying cover disappears or is exhausted.
A drop-down clause lowers a layer's attachment point in cases set out in the contract, mainly the exhaustion of an underlying cover or the failure of the reinsurer that carried it. What sets it apart from automatic cascading is the trigger. Cascading responds to normal erosion; drop down also responds to an abnormal disappearance, so it protects against credit risk as much as against frequency. It plugs the hole in the tower. When a middle layer is written by an insolvent reinsurer, nothing fills the gap, and the cedant pays for the layer above without being able to reach it. Drop down slides that upper layer down. Two drafting points need care: what counts as exhaustion of the underlying cover, and whether the drop carries an additional premium. Without a clear answer, the dispute 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.
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