The distinction between low layers frequently hit by attritional losses and high layers reserved for catastrophes.
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, located just above the cedant's retention, that is regularly hit by ordinary, attritional, frequency losses. Its pricing relies largely on burning cost, since historical data are plentiful at that level, and its rate on line is high because the reinsurer responds often. The catastrophe layer, by contrast, is a high layer, rarely reached, intended to absorb exceptional events of great severity. Its pricing cannot rest on history, too sparse at these levels, and draws on catastrophe modeling and scenario analysis. Its rate on line is low, but its prudential role is decisive, since it protects the cedant's solvency against major shocks. Understanding where a layer sits on this scale is essential, because the pricing method, the volatility and the prudential function differ radically between the bottom and the top of the program. In cyber, the boundary is blurred by accumulation risk, which can turn frequency losses into a peak event.
A program combines a working layer of 5 million excess of 5, frequently hit, with a catastrophe layer of 50 million excess of 50, never triggered to date but essential in the event of a systemic event.
working layer, cat layer, tranche de travail, tranche catastrophe