Attachment and Exhaustion Points
Definition
Attachment point is the loss level where an insurance-linked security starts taking losses. Exhaustion point is the level where the investor's principal is fully wiped out.
Why it matters
These two points define the risk layer an investor owns. A higher coupon is not meaningful without knowing how close the layer sits to expected losses.
Technical details
Simple example
Attachment is where losses begin for the tranche.
Exhaustion is where the tranche is fully consumed.
If a cat bond attaches at $1 billion of covered hurricane losses and exhausts at $1.3 billion, investors absorb losses in that $300 million band.
What to compare
Compare attachment probability, expected loss, modeled tail loss, peril zone, sponsor, collateral terms, and whether the trigger is indemnity, industry loss, modeled loss, or parametric.