Rate on Line (ROL) Calculator
(Inverse of ROL: Years to pay back the limit via premiums)
How to Calculate Rate on Line (ROL) in Reinsurance
In the specialized world of Excess of Loss (XoL) reinsurance, pricing is often discussed in terms of "Rate on Line" (ROL). Unlike standard insurance rates which might be applied to a property value or payroll amount, the Rate on Line specifically measures the cost of the reinsurance premium relative to the limit of indemnity (coverage) provided.
This calculator allows underwriters, brokers, and risk managers to instantly compute the ROL percentage and the corresponding Payback Period for any given reinsurance layer.
The Rate on Line Formula
The calculation for Rate on Line is straightforward but fundamental to non-proportional reinsurance pricing. It represents the premium as a percentage of the limit.
Where:
- Reinsurance Premium: The actual dollar amount paid by the cedant to the reinsurer for the specific layer of coverage.
- Reinsurance Limit: The maximum amount the reinsurer agrees to pay for that layer (also known as the capacity or layer width).
Calculation Example
Let's assume an insurance company (the cedant) wants to buy a catastrophe reinsurance layer. The layer covers $5,000,000 in excess of $5,000,000.
- Limit (Capacity): $5,000,000
- Premium Quoted: $750,000
To calculate the ROL:
$$ ROL = \frac{750,000}{5,000,000} = 0.15 $$
Expressed as a percentage, the Rate on Line is 15%.
Understanding the Payback Period
A critical concept closely related to ROL is the "Payback Period." This metric essentially asks: "If there are no losses, how many years would the cedant have to pay premiums to equal the limit of the coverage?"
The Payback Period is the mathematical inverse of the Rate on Line:
OR
Payback Period = Reinsurance Limit / Reinsurance Premium
Using the example above where the ROL is 15% (0.15):
$$ Payback = \frac{1}{0.15} = 6.67 \text{ years} $$
This means it takes roughly 6.7 years of premiums to "pay for" one total loss of the limit. Reinsurers use this to assess risk; a lower payback period implies a higher risk layer (because the premium is high relative to the limit), while a higher payback period implies a lower risk layer (remote probability of loss).
When is Rate on Line Used?
Rate on Line is primarily used in Excess of Loss (XoL) reinsurance treaties. It allows for quick comparison between different layers of a program.
| Layer | Limit ($) | Premium ($) | Rate on Line (ROL) | Risk Profile |
|---|---|---|---|---|
| Working Layer | 1,000,000 | 200,000 | 20.0% | High frequency of loss |
| Middle Layer | 2,000,000 | 100,000 | 5.0% | Moderate frequency |
| Catastrophe Layer | 5,000,000 | 125,000 | 2.5% | Low frequency (Remote) |
Why is ROL Important?
- Benchmarking: Brokers use ROL to compare pricing across different years or different reinsurance markets.
- Pricing Consistency: It helps ensure that higher layers (which should have lower probabilities of loss) are priced cheaper relative to their limit than lower working layers.
- Simplicity: It provides a clean, single percentage to discuss the cost of capacity without getting bogged down in exposure rating technicalities during initial negotiations.
Common Mistakes
Do not confuse Rate on Line with the Rate on TIV (Total Insured Value). Rate on TIV is calculated based on the total value of the property portfolio, whereas ROL is based solely on the limit of the reinsurance layer purchased.