Cascading layer

A cascading layer is one whose attachment point drops automatically once the layers beneath it have been exhausted by an earlier event. Instead of sitting inert above a hole, it moves down into the vacated position and gives the cedant a first line for the next event. The problem it solves is precisely horizontal exhaustion: a cedant that has used up its low reinstatements is left bare at the bottom of the program while having paid for upper layers that will not be reached, a situation where the protection exists but in the wrong place. Cascading puts the capacity back where the risk is. Its cost is mechanically higher than a fixed layer of the same limit, since the reinsurer accepts an exposure whose attachment can fall, and therefore a higher probability of being hit. It is found mainly on programs exposed to frequency perils, and in markets where low layer capacity is scarce or expensive.

A Caribbean insurer renews a three-layer program in 2026: 10 million xs 5, 20 xs 15, and 40 xs 35 with a cascade clause. A July cyclone consumes the first two layers and 12 million of the third. For the rest of the season the third layer drops to a 5 million attachment with 28 million of remaining limit. Without the cascade, the cedant would have carried every loss below 35 million in net through December.

Cascading layer, Cascade, Tranche descendante, Drop down layer