Payback period

Textbook case: at a 4% rate on line, the layer must go twenty-five years without a loss to pay back one total loss. The payback period is the theoretical number of years during which the reinsurer must collect the layer premium with zero losses to recover a full layer payout (equal to the limit). Formula: payback = 1 / ROL. A 20% ROL gives a 5-year payback. A short payback (< 3 years) signals a heavily triggered, expensively priced layer. A long payback (> 10 years) corresponds to a high cat layer, rarely triggered, with a low ROL. Payback is used to quickly assess whether a layer price is consistent with its expected return period: if the statistical return period for a full-layer loss is 25 years and the payback is 5 years, the layer is expensively priced.