Top and drop cover

Textbook case: a 60 XS 240 million layer at a 1.1% rate on line, or 660,000 euros. After a second storm of 48 million, it drops down and pays 33 million above a 15 million retention. Top and drop is a variant of cascading: a layer placed at the top of the program serves two functions, one after the other. On the first event it plays its normal role as extreme protection, above everything else. If that event does not reach it, it drops down for the second event and sits at a low attachment, often that of the first layer, by then exhausted. The cedant thus buys one block of capacity for two uses that cannot both arise at once. The problem it solves is reinsurance budget efficiency. Top capacity is the cheapest on a rate on line basis, since it is rarely reached, but it is also the most likely to go unused. Letting it drop into second position turns that dormant capacity into frequency protection, at a cost far below an extra reinstatement on the bottom layer. The trade-off: a very large first event consumes the layer at the top, and it is then unavailable below.