Layer limit

The layer limit is the amount of cover a reinsurance layer provides above its attachment point, and the second half of the standard notation. A layer described as ten in excess of five million has a five million attachment and a ten million limit, hence an exhaustion point of fifteen million. It determines three things at once: the maximum recoverable on one event, the denominator of rate on line and therefore how price reads, and the capacity consumed when a loss erodes the layer. It solves a structuring problem. Rather than buying one block of cover from the retention to the top of the program, the cedant stacks layers of differing limits: it can place each with the reinsurers pricing it best and tune the number of reinstatements by height. A badly sized limit is paid for twice: too short, it leaves a gap between two layers; too long, it buys capacity the catastrophe model never reaches.