Definition:Risks-attaching basis
📅 Risks-attaching basis is a reinsurance contract structure under which coverage applies to all policies whose inception dates fall within the reinsurance treaty period, regardless of when the losses under those policies actually occur. If a treaty runs from January 1 to December 31, every original policy that incepts during that calendar year is covered for its full term — even if a claim arises after the treaty has expired. This distinguishes the risks-attaching basis from the losses-occurring basis, where the trigger is the date of the loss event rather than the date the underlying policy began.
⚙️ Under this structure, the reinsurer's exposure can extend well beyond the treaty's nominal expiration. Consider a 12-month treaty on a risks-attaching basis that covers annual policies: a policy incepting on December 31 of the treaty year will run until the following December 30, meaning the reinsurer remains on risk for losses occurring nearly a full year after the treaty period closes. This "tail" effect is a key consideration in pricing and reserving. Actuaries must factor in the additional earned exposure and the extended time horizon when estimating ultimate losses. For the ceding company, the risks-attaching basis provides certainty that every policy written during the treaty period has reinsurance protection for its entire life, simplifying the matching of reinsurance to the underlying book.
🔍 This basis is prevalent in proportional treaties such as quota shares and surplus share arrangements, and it is the standard structure used for most Lloyd's years of account. It works particularly well when the ceding insurer wants to ensure continuity of cover for policies already in force, avoiding the gap risk that can arise under losses-occurring treaties when a policy straddles two treaty periods. However, the extended runoff period demands robust data exchange between cedant and reinsurer, and contract wording must clearly define how bordereaux reporting and premium adjustments will operate during and after the treaty term.
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