Exam 9: A reinsurance layer requires the correct loss basis
An exposure-rating calculation must match the contract’s attachment, limit and underlying loss basis. A ceded payment is not the same variable as a ground-up loss. Inflation and policy limits can change the share of expected loss reaching the layer.
Original layer example
A layer of 500 above 500 pays min(max(X−500,0),500). With an exponential ground-up loss of mean 1,000, expected layer payment is 1,000(e^−.5−e^−1), about 238.65. Multiplying the limit by the attachment exceedance probability overstates payment because not every attaching loss exhausts the layer.
Study check
Draw the payment function, identify the contract basis and explain where an exposure curve or severity assumption enters. Then consider a larger underlying policy limit. Separate distribution assumptions from contract terms and check the current Exam 9 catastrophe and reinsurance readings.
Reading sources
ActNet editorial guide · October 1, 2026 · Original illustrative examples.