Ultimate net loss
The definition, in an excess of loss treaty, of the amount to which the retention applies: what the cedent actually pays, costs included, net of recoveries and inuring reinsurance.
Ultimate net loss is the central notion of an excess of loss treaty: the retention and the limit are measured against it. It designates the sum actually paid by the cedent to settle a loss or event, including, depending on the wording, settlement costs directly attributable to it, and net of salvage, recoveries collected and recoveries under reinsurances that apply before the treaty. Each element of the definition shifts exposure. Including defense costs or not changes how often the layer is reached. Deducting inuring reinsurance or not decides whether the treaty triggers on gross or net. And the word ultimate means the final calculation awaits the closing of the claim, which can take years in liability, during which payments are made on estimates. Treaties also specify that the cedent's insolvency does not reduce the reinsurer's liability, and that net loss may include neither the cedent's overhead nor extra-contractual obligations, absent an extension. The treaty underwriter reads this definition before pricing.
Textbook case: a cedent settles a 12 million euro fire loss, incurs 400,000 euros of attributable adjustment costs and recovers 1.4 million from the liable third party. Its ultimate net loss is 11 million; under an 8 million excess of 5 million treaty, the reinsurer pays 6 million.
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