Annual Aggregate Deductible Clause
The annual aggregate deductible clause sets a total annual retention that the cedent must first absorb from the sum of all losses falling under the non-proportional treaty before the reinsurer becomes liable.
- Clause type
- Limitation
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
While an ordinary retention applies per loss or per occurrence, the annual aggregate deductible sums up all losses eligible under the non-proportional treaty over the treaty year. Only once that sum exceeds the agreed aggregate retention does the reinsurer’s liability begin – protecting it against a high frequency of medium-sized losses that would each individually fall below a normal per-occurrence retention.
Effect and limits
The clause systematically shifts frequency risk to the cedent and is therefore usually combined with a lower per-loss retention. It is mainly used on stop-loss and aggregate XL covers and in conjunction with reinstatement clauses, since both mechanisms structure the overall liability for the treaty year.
Negotiation and practice
The level of the aggregate deductible is calibrated on the basis of historical loss frequency and severity distribution; set too low, the cover loses its non-proportional character; set too high, it becomes economically worthless.