An index clause, also referred to as an inflation clause, a stability clause,
or an indexation clause, redistributes inflation-related increases in the costs
of claims between the ceding insurer and its reinsurer. In most excess-of-loss
contracts, the ceding insurer's retention and the reinsurance limit amounts
are fixed dollar (or other currency) amounts, and the reinsurer's liability
triggers at the point the retention is met. If neither the retention nor the
limit is indexed, claim inflation can cause a loss to reach the retention
amount sooner and more frequently than anticipated. Further, if there is
greater inflation after the claim reaches the retention amount, the
reinsurer's liability will not increase with the rising cost of the claim.
The index clause achieves redistribution of these inflation-related increases
by adjusting the retention and limit amounts of a reinsurance contract in
accordance with an inflation index.