Loss corridor

Textbook case: on 50 million euros of ceded premium, the cedant takes back at 100% a corridor from 70 to 85% loss ratio. When the final ratio is 90%, that corridor returns 7.5 million of losses to it. A loss corridor is a provision in a proportional treaty by which the cedant takes back for its own account the losses falling between two loss ratio levels. Below the corridor the proportional split works normally; inside it, the cedant bears all or part of the burden; above it, sharing resumes. The corridor targets the intermediate zone, where results deteriorate without anything catastrophic happening. There the reinsurer suspects loosening underwriting rather than bad luck. By making that band expensive for the cedant, the corridor restores the incentive exactly where it was being lost. Protection against extreme scenarios remains intact above it. In a hard market it is a powerful negotiating tool: it keeps a presentable commission rate while transferring risk back to the cedant. The commission and the corridor are therefore always read together, never one without the other.