WHAT IS ULTIMATE NET LOSS (UNL)?

Before we get into the clause, let us understand what is UNL? If we are talking of UNL for a reinsured, it is the ultimate net loss after all reinsurance recoveries. For example, if a From Ground Up (FGU) risk loss is USD 100 m and there is a recovery of USD 92 m from proportional reinsurers and USD 7 m from Risk XL reinsurers, the UNL is 100-92-7 = USD 1 m.

WHERE DO WE USE UNL IN REINSURANCE?

We use it in RISK XL & CAT XL.

For example, in a RISK XL under Treaty Limits, we may say:

First Layer:

To pay up to USD 9 m Ultimate Net Loss each and every Loss and each and every Risk
Excess of
USD 1 m Ultimate Net Loss each and every Loss and each and every Risk.

When we are using the term UNL here, its meaning changes. Because this is defining the limits and deductibles for the first layer of this Risk XL treaty.

So, here UNL means the Loss after recoveries from proportional treaties. In the example, we gave, UNL is USD 100 m minus USD 92 m = USD 8 m.

So, under First Layer of Risk XL, we are saying deductible is USD 1 m and Limit is USD 9 m. But recovery is of UNL for reinsured. Hence, deductible is USD 1 m and since UNL is USD 8 m, recovery is USD 7 m.

See how the meaning of UNL changes based on the context where it is used.

UNL CLAUSE

While UNL clause is defining UNL, it is also going much beyond to bring clarity into what all can be considered as part of the Loss.

For example, the clause may say-expenses of litigation can be included, Salvages and recoveries to be deducted, Loss adjustor fees can be included but Salaries and Wages of claims department officials of reinsured or management expenses in handling this claim cannot be included.

Blog by Atmaram Cheruvu