Full consumption of a layer's limit by one or more losses, leaving it inoperative until reinstated.
A layer is exhausted when the reinsurer's cumulative payments reach its limit. It then stops responding, and any further loss falls back on the cedant or on the layer above, depending on the structure. Exhaustion is lifted by reinstatement where the contract provides for it, most often against a reinstatement premium; with no reinstatement available, the protection is gone for the rest of the period. What the concept clarifies is how a program should actually be read: a cedant announcing two hundred million of cover only has it while no layer has been eroded, and the capacity left after a first event is the only figure that matters for facing a second. Risk departments therefore track exhaustion in real time through a heavy season, layer by layer, rather than the program's headline figure. It is this gap between nominal and available capacity that has repeatedly caught the market out in multi event years.
In September 2022, Hurricane Ian produced roughly 50 billion dollars of insured losses in Florida. Regional insurers saw their first two layers fully exhausted by that single event. One carrier holding 30 million xs 10, then 60 xs 40, consumed 90 million of capacity in a week; it was left with only the top 110 million xs 100 layer for the rest of the season, plus one reinstatement on the middle layer.
Exhaustion, Épuisement, Burn through, Tranche épuisée