Loss Ratio Cap Clause
The loss ratio cap clause limits the reinsurer's liability under a proportional treaty to a maximum loss ratio, above which any further loss reverts to the cedent.
- Clause type
- Limitation
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
Proportional treaties could theoretically expose the reinsurer to unlimited liability in a catastrophic loss year, since the cession percentage applies regardless of the absolute loss amount. The loss ratio cap clause sets an upper limit – for example 200 percent of premium – above which the reinsurer makes no further payments.
Effect and limits
The cedent bears losses above the cap entirely on its own account, which can create a substantial burden in extreme years. The clause is usually combined with additional non-proportional cover (stop-loss or aggregate XL) to specifically address these peaks.
Negotiation and practice
Calibrating the cap is based on historical loss ratio distribution and the risk appetite of both parties; a cap set too low shifts significant risk back to the cedent, while a cap set too high barely reduces the premium-saving effect.