Reinstatement

Reinstatement is the mechanism that allows, after a loss has eroded or exhausted a non-proportional reinsurance layer, the capacity of that layer to be restored for the remainder of the cover period, on payment of a reinstatement premium. Without this mechanism, a cedant that suffered a major loss early in the year would find itself without protection for subsequent events, a situation that is particularly dangerous for risks liable to recur, such as natural catastrophes or waves of cyber attacks. The treaty specifies the number of reinstatements allowed, sometimes unlimited but most often capped at one or two, as well as the financial terms, the reinstatement premium being generally proportional to the share of the layer consumed and sometimes to the time remaining. Reinstatement is therefore an economic trade-off for the cedant, which pays to restore protection it had hoped not to use, and an important cost factor in years of multiple losses. In cyber reinsurance, where the potential for systemic events to recur within a single year is real, reinstatement terms attract growing attention.

A cedant sees its cat layer exhausted by a first event in March. To remain protected until year-end, it pays a reinstatement premium that restores the layer's capacity, ready to respond to a second event.

reinstatement, reconstitution, prime de reconstitution