Glossary
Rate on Line (ROL)
Rate on line (ROL) is the premium for a reinsurance layer or excess insurance policy divided by the layer's limit, expressed as a percentage. It shows the price of protection relative to the most the reinsurer could pay and is the standard way to quote catastrophe and excess of loss layers.
Formula
Example
An insurer buys a catastrophe reinsurance layer covering $50,000,000 of losses in excess of $100,000,000, so the limit is $50,000,000. The premium is $5,000,000. Rate on line = $5,000,000 / $50,000,000 = 10%. The implied payback period is 1 / 10% = 10 years, meaning the reinsurer would collect premiums equal to one full limit loss in about ten loss-free years.
How it is used in underwriting
Reinsurance underwriters and buyers use ROL to compare pricing across layers, years and markets. Lower layers, which are more likely to be hit, carry higher ROLs, while remote upper layers carry lower ROLs. Underwriters compare ROL with modeled expected loss to the layer: the ratio of premium to expected loss, sometimes called the multiple, shows how much margin is built in for uncertainty, expenses and capital. Movements in ROL across renewals are a common way to describe hardening or softening reinsurance markets for a given peril or region.
ROL is a price measure, not a risk measure. Two layers with the same ROL can have very different expected losses if their attachment points or underlying exposures differ, so ROL should always be read together with the probability of attachment and exhaustion. Reinstatement provisions matter: a layer with paid reinstatements costs more after a loss, changing the effective rate. The concept is also related to rate on line in excess casualty and to pricing in insurance-linked securities, where the spread on a catastrophe bond is compared with the expected loss of the bond in a similar way.
Frequently asked questions
How is rate on line calculated?
Divide the reinsurance premium for a layer by the layer's limit. For example, a $3,000,000 premium for a $30,000,000 limit is a 10% rate on line. The inverse, ten years in this case, is the payback period, the number of loss-free years needed for premium to equal one full limit loss.
What is the difference between rate on line and expected loss?
Rate on line is the price charged relative to the limit. Expected loss is the average annual loss the layer is projected to suffer, usually from catastrophe models. Comparing the two shows the margin over expected loss that compensates the reinsurer for uncertainty, expenses and capital.
Why are lower reinsurance layers more expensive?
Lower layers attach closer to the ground and are more likely to be triggered by smaller, more frequent events. Their expected loss is therefore higher relative to their limit, and reinsurers charge a higher rate on line to compensate. Upper layers are hit only by rare, severe events and carry lower rates on line.
Related terms
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