Reinsurance Rate on Line (ROL) Calculator
What is Rate on Line (ROL)?
In the reinsurance industry, the Rate on Line (ROL) is a critical metric used to determine the cost of coverage relative to the amount of liability (the limit) provided by the reinsurer. It represents the premium as a percentage of the total coverage limit.
Essentially, ROL tells the cedent (the insurance company buying the reinsurance) how much they are paying for every dollar of protection. From the reinsurer's perspective, it indicates the yield or the gross return on the capacity they are committing to a specific risk.
The Rate on Line Formula
The standard calculation for ROL is straightforward:
Understanding the Results
- Payback Period: This is the inverse of the ROL. It represents how many years it would take for the reinsurer to collect enough premium to cover a total loss of the limit. (Formula: 100 / ROL).
- Net ROL: This takes into account the brokerage fees or commissions paid out. It represents the actual "take-home" rate for the reinsurer after acquisition costs.
Practical Example
Scenario: An insurance company seeks $5,000,000 in catastrophe excess of loss coverage. The reinsurer quotes a premium of $500,000.
- ROL: ($500,000 / $5,000,000) × 100 = 10%
- Payback Period: 100 / 10 = 10 Years
This means the insurer is paying 10 cents for every dollar of coverage, and if a total loss occurs, it would take the reinsurer 10 years of similar premiums to recover that single payout.
Why ROL Matters in Reinsurance
ROL is the primary benchmark for pricing comparisons. Because reinsurance layers vary in size, looking at the absolute dollar premium is often misleading. ROL allows underwriters and brokers to compare the relative cost of different layers, different programs, and historical pricing trends (market hardening or softening) on an apples-to-apples basis.