Working layer vs catastrophe layer

The distinction between the working layer and the catastrophe layer shapes the construction of an excess-of-loss reinsurance program. The working layer is the low layer, sitting just above the cedant's retention, that ordinary attritional frequency losses hit regularly. Historical data are plentiful there, so it is priced largely on burning cost, and its rate on line is high because the reinsurer responds often. The catastrophe layer is a high layer, rarely reached, built to absorb exceptional events of great severity. At those levels history is too thin to price on, so the work moves to catastrophe modeling and scenario analysis. Its rate on line is low. Its prudential role is decisive, though, since it is what protects the cedant's solvency against major shocks. Knowing where a layer sits on this scale tells you how to price it, what volatility to expect and what prudential job it does, and all of that changes radically from the bottom of the program to the top. In cyber the boundary blurs, because accumulation risk can turn frequency losses into a peak event.