Stability / Index Clause
The stability clause indexes the retention and limit of a non-proportional treaty to an agreed index, keeping the real coverage effect stable over the life of the treaty against inflation.
- Clause type
- Premium provision
- Origin/Market
- Reinsurance market
- Favours
- Insurer
- Negotiability
- Negotiable
Purpose
On multi-year or long-tail excess of loss treaties, inflation can erode the real value of an originally high retention, leaving the reinsurer bearing losses that were never intended to fall below the economic threshold. The stability or index clause links the retention and limit to a wage or price index and adjusts both figures at the time of loss accordingly.
Effect and limits
As long as the index movement stays within an agreed corridor, the treaty terms remain unchanged; adjustment only occurs beyond that band, avoiding constant recalculation for minor fluctuations. The clause affects only the monetary amounts stated in the treaty, not the period of cover or the scope of perils.
Negotiation and practice
The choice of index (a general wage index, a sector-specific construction cost index, etc.), the base date and the width of the corridor are the key negotiation points. The clause is particularly relevant for long-tail lines such as liability, where years can pass between loss occurrence and settlement.