In XOL reinsurance, we hear the terms-Pay Back Period and Rate of Line (ROL). Let us understand these terms.

Let us consider that the premium payable for a layer USD 10 million xs USD 1 million is USD 0.5 million.

Pay Back Period: The unit is number of years. It is the number of years the treaty, if it continues at the present premium level, the reinsurer will be able to recoup their loss paid if the entire layer is burnt out.

In above example, entire layer burnt out means that means reinsurer pays USD 10 million. If every year reinsurer gets the same premium, that is USD 0.5 million, then reinsurer requires 20 years to recover that USD 10 million. This is assuming no further losses in the next 20 years.

So, payback period is 20 years.

RATE ON LINE: The unit is percent (%). This a measure of appropriateness of reinsurance premium relative to the reinsurance limit.

Rate on Line = (Reinsurance premium paid/ Reinsurance limit) expressed as percentage.

In above example

ROL = 0.5/10 = 0.05 = 5%.

Rate on Line is 5%.

As we can see, ROL is a mathematical inverse of Pay Back Period.

Reinsurance is a long-term relationship. If the cedant is used to keeping on changing its reinsurance panel every year or reinsurers are used to getting in and getting out of market frequently, the above concepts lose their significance.

Blog by Atmaram Cheruvu