reinstatement
Suppose an insurer buys a catastrophe layer of 10 million in cover, and a hurricane uses it all up in June. The hurricane season is far from over — a second storm could strike in September. Has the insurer just spent its whole reinsurance budget on the first event, leaving it naked for the rest of the year? Reinstatement is the contract feature that answers this: after a layer is partly or wholly exhausted by a loss, it can be refilled, restoring the cover for future events.
When a layer is reinstated, its limit is reset so it can respond again. This is usually not free: the cedant pays a reinstatement premium, often calculated pro-rata to the amount of limit being restored, and treaties specify how many reinstatements are allowed (one, two, or sometimes unlimited). For example, a 10 million layer with one reinstatement at 100 percent provides 10 million for a first event; if that event uses the whole layer, the cedant pays another full premium to put 10 million back for a second event, after which the cover is exhausted for the year. Reinstatement premiums are commonly charged 'as to time and as to amount', meaning prorated by both how much limit is used and how much of the year remains.
Reinstatement is central to catastrophe reinsurance, where multiple large events in one season are a real possibility and an insurer needs its protection to keep working after the first blow. The number and cost of reinstatements is a key term actuaries negotiate, because it determines whether the program survives a bad season or merely a single bad day. A common misconception is that reinstatement is automatic and costless — in practice it usually triggers an additional premium, and a layer with no reinstatements gives only one fill of cover for the entire period, after which any further event is fully the cedant's.
A 10 million catastrophe layer carries one reinstatement at 100 percent. A June storm uses the full 10 million; the cedant pays a second full premium to reinstate, restoring 10 million for the rest of the season. A September storm of 8 million is then covered. A third storm in the same year, however, finds the layer exhausted.
After a loss eats a layer, a reinstatement premium refills it for the next event — for a limited number of times.
Reinstatement is usually neither automatic nor free. A layer with no reinstatements is one-shot cover; once a single event exhausts it, the rest of the period is the cedant's alone.