Question 1

Why are index clauses mainly used on long-tail lines like casualty rather than property?

Accepted Answer

Long-tail claims can take many years to settle, during which inflation erodes a fixed nominal retention's real value — A property claim is fixed and settled within the same year as the loss, so there is little inflation gap to correct. A casualty claim developing over a decade is exactly where the erosion happens.

Question 2

An index clause raises a layer's attachment point from $5M to $7.10M after nine years of inflation. Why doesn't this necessarily reduce the cedent's recovery on an inflated claim?

Accepted Answer

The limit rises by the same factor, so the whole layer is wider in nominal terms and can absorb more of an inflated claim — Both boundaries move together. A higher attachment point sounds like less cover, but a proportionally higher limit widens the layer in nominal terms by exactly the same factor.

Index / Stability Clause

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