Loss on line

Loss on line relates a layer's expected annual loss to its limit, and therefore expresses as a percentage what the layer should cost if sold at pure cost. It differs from rate on line, which relates the premium actually paid to the same limit: the first is a modeled quantity, the second a market price, and the gap between them measures the reinsurer's margin. The problem it solves is comparing layers with each other and years with each other. Two layers with identical rate on line can have very different loss on line, one being expensive and the other underpriced, and only setting the two side by side reveals it. The ratio of rate on line to loss on line, called the multiple, is the indicator insurance-linked securities investors watch first, since it says how many times expected loss is being paid to them. A contracting multiple signals a market where capital is flowing in, whatever the absolute level of prices.

A catastrophe layer with a 100 million euro limit carries a modeled expected loss of 1.4 million, a loss on line of 1.4 percent. It places in 2026 at 4.2 million of premium, a rate on line of 4.2 percent and a multiple of 3. At the 2027 renewal, after a loss-free year and an influx of capacity, the same layer places at 2.8 percent, for a multiple cut to 2.

Loss on line, LOL, Taux de perte sur ligne, Perte attendue sur portée