Net retained lines clause
A clause in an excess of loss treaty that limits cover to the share the cedent actually retains for its own account, after its other reinsurances, and that protects it when an inuring reinsurer defaults.
The net retained lines clause states that the treaty applies only to the shares of risk the cedent retains net for its own account, after applying its other reinsurances, and that only those shares enter the loss calculation. It pursues two aims. The first is to prevent the excess of loss reinsurer from paying a fraction of risk the cedent has already ceded elsewhere, on a quota share or facultative basis. The second, subtler, appears in most wordings: if an inuring reinsurer fails to pay, through insolvency or refusal, the calculation is made as if that reinsurer had paid. The cedent therefore cannot shift another reinsurer's default onto its excess of loss treaty, and bears that counterparty risk alone. For the reinsurer, the clause limits exposure to the net it priced; for the cedent, it requires monitoring the quality of all its reinsurers, since one's default is picked up by no other. The clause interacts directly with the ultimate net loss definition, and the two must be read together.
Textbook case: a cedent writes a 20 million risk, cedes 40 percent facultatively and retains 12 million net. A total loss occurs and the facultative reinsurer, now insolvent, does not pay its 8 million. The excess of loss treaty calculates the loss on the 12 million retained, as if the facultative had paid: the cedent alone bears the unpaid 8 million.
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