Net line is the level of risk that insurance company holds after it ceded some of risk to reinsurers. It shows to how high losses insurer is exposed. Most of the insurers try to reinsure their risks. This enables them to take more risk from their customers and then earn more. But not all the risk can be reinsured, as well as it would be very expensive. Therefore insurers are exposed to some risks that they would have to cover using their resources. That part of risks is the net line. All the liabilities of the insurer are called insurer's gross line.
The ration between gross line and net line is important for investors as well as regulators. It shows reliability of the insurer. It is necessary to state that insurer is responsible for whole sum of insurance. Therefore if the reinsurer becomes insolvent, insurer will have to cover all the costs. Too low limit of net line is therefore dangerous from customers and regulators point of view.
- Mayers, D., & Smith Jr, C. W. (1990). On the corporate demand for insurance: evidence from the reinsurance market. Journal of Business, 19-40.
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