Loss Corridor Clause
The loss corridor clause sets a band of loss ratios within which the cedent bears losses entirely on its own account, while the reinsurer is only liable below and above the corridor.
- Clause type
- Limitation
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
A proportional treaty normally covers losses linearly according to the cession percentage. The loss corridor clause breaks that linearity: within a defined band of loss ratios – for example between 80 and 100 percent – the cedent bears the full loss itself, while reinsurance responds normally outside that corridor.
Effect and limits
The clause reduces the reinsurance premium, as the reinsurer is relieved in the middle, frequently occurring loss range. It only works if the corridor is realistically calibrated to the cedent’s expected loss distribution – a poorly placed corridor can significantly burden the cedent in economically difficult years.
Negotiation and practice
The position and width of the corridor must be negotiated closely against historical loss experience and portfolio volatility. The corridor is often combined with a loss ratio cap to fully define the overall risk-sharing structure.