Layer exhaustion
Full consumption of a layer's limit by one or more losses, leaving it inoperative until reinstated.
September 28, 2022: Ian makes landfall in Florida as a Category 4, and regional insurers watch several layers of their program go on that one hurricane. 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. Reinstatement lifts the exhaustion 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. The concept forces a program to be read as it really stands: a cedant announcing two hundred million of cover only has it while no layer has been eroded. After a first event, the capacity left is the only figure that matters for facing a second. Through a heavy season, risk departments therefore track exhaustion in real time, layer by layer, rather than the program's headline figure. That gap between nominal and available capacity caught the market out in multi-event seasons.
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. For the rest of the season it was left with only the top 110 million xs 100 layer, plus one reinstatement on the middle layer.
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