Successive consumption of a program's layers by a single large event, from the bottom up.
Vertical exhaustion describes how a single very costly event works through a program from the bottom up: it exhausts the first layer, erodes and then exhausts the second, and stops somewhere inside an upper layer. The program is working exactly as designed, since it was sized for a loss of a given return period, and the test it faces is one of height. The figure that matters is the top of the program against the probable maximum loss: if the event exceeds the top, the cedant carries the whole excess net, with no recourse. It is contrasted with horizontal exhaustion, where several mid-sized events consume the same low layer repeatedly and the test is the number of reinstatements rather than the height. The two modes call for opposite answers, height on one side, reinstatements and aggregate cover on the other, which is why a program well built for one can fail on the other.
The Tohoku earthquake and tsunami of March 2011 produced roughly 35 billion dollars of insured losses, far beyond the scenarios several Japanese programs had assumed. One cedant whose program topped out at 800 million dollars saw every layer exhausted vertically and carried everything above that top in net. The April 2011 renewals raised program tops by 30 to 60 percent across the Japanese market.
Vertical exhaustion, Consommation verticale, Épuisement en hauteur