Layer
A layer is a defined liability band within an excess-of-loss reinsurance program, situated between a lower retention and an upper capacity limit, frequently underwritten by different reinsurers.
Concept
In excess-of-loss reinsurance, a layer refers to a clearly defined liability band bounded by a lower limit (the retention or attachment point) and an upper limit (the capacity). Losses exceeding the retention are borne by the reinsurer up to the amount of the agreed capacity; any loss amount beyond that falls either into a higher layer or remains with the cedent.
Program Structure and Layering
Larger excess-of-loss reinsurance programs frequently consist of several layers stacked on top of one another (so-called “layering” or a “tower”), with different reinsurers or groups of reinsurers each underwriting individual layers. This structure allows very high total capacity to be distributed across multiple market participants and enables the premium to be differentiated in a risk-adequate manner according to the respective layer’s probability of attachment and loss severity.
Pricing
The premium for an individual layer is significantly determined by its “rate on line” (the ratio of premium to capacity) and by the expected frequency of losses attaching to that layer; lower layers with a higher probability of attachment are correspondingly more expensive than higher layers, which are only drawn upon in extreme loss events.