DEFINITION of 'Rate On Line'

The ratio of premium paid to loss recoverable in a reinsurance contract. Rate on line (ROL) represents how much an insurer has to pay to obtain reinsurance coverage, with a higher ROL indicating that the insurer has to pay more for coverage. Rate on line is the inverse of a reinsurance contract’s payback period.

BREAKING DOWN 'Rate On Line'

Insurance companies use reinsurance in order to free up additional capacity to underwrite new policies by transferring some of their liabilities to reinsurers. In exchange for taking on some of an insurer’s liabilities, reinsurers receive a portion of the premium that insurer’s collect on the policies that they underwrite.

Pricing reinsurance contracts requires the reinsurer to examine a number of factors, including the insurer’s exposures and recent losses experienced by the industry. Reinsurers look at market benchmarks, including the frequency and severity of claims made. If the number of reinsurers is limited and historical loss experience severe, insurers should expect to pay more for coverage. This may push the insurer to adjust its underwriting activities by charging a higher premium or change the way it invests its premiums in order to maintain excess capacity.

For example, a property insurance company wants to shift some of its risk to a reinsurance company, specifically to cover the possibility that a catastrophic flood will drastically increase its exposure to losses. Both the reinsurer and insurer examine the severity and frequency of past claims, and decide on a contract in which the reinsurer will take on up to $20 million in liabilities. In exchange, the insurer agrees to provide the reinsurer with $4 million in premiums. The rate on line for this contract is calculated by dividing the premium by the coverage, with the result being a 20 percent rate on line. The payback period would be five years.

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