> For the complete documentation index, see [llms.txt](https://docs.re.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.re.xyz/how-reinsurance-works/underwriting-reserving-and-timing.md). # Underwriting, reserving, and timing ## Underwriting, Reserving, and Timing ### Risk Overview Reinsurance yield accrues with a lag. A substantial interval separates the moment a reinsurance contract is written from the moment it's effectively concluded: when the claims period has ended, all claims have been settled, and the likelihood of further claims is minimal. Throughout that interval, the reinsurer must hold reserves against possible claims, which delays profit recognition and keeps capital tied up until uncertainty declines. ### About NAV NAV stands for Net Asset Value. For reUSD and reUSDe, it's the price of each token, updated once per day. Each day, the protocol takes the previous day's NAV and adds the day's accrued yield to get the new price. That price is then reflected in the oracles the protocol maintains. The yield formula is different for each token. reUSD is the weighted average of deployed and undeployed capital. Undeployed capital earns the Ethena basis trade rate. Deployed capital earns the risk-free rate. Both use a trailing seven-day average, and an additional yield is added on top. The current reUSDe earns the risk-free rate plus a spread. The current reUSDe spread is 850bps. Spreads reflect what the protocol can pay at a given time and are subject to change. ### What Reserves Are Reserves are funds that reinsurers set aside to pay both reported claims that are not fully settled and claims on covered events that have occurred but have not been reported. Reserves are continually adjusted over the lifetime of a claim and the lifetime of a reinsurance contract. For individual claims, they are set based on the expert judgment of claims experts and actuaries using information specific to the claim and other similar historical claims. They are updated as new information emerges and become more precise with claim age. Reserves matter because they determine how much of a reinsurer's capital is tied up. Capital held in reserve can't be used for investment or growth. Reinsurers have some leeway in how they set reserves, which makes reserve discipline as essential as underwriting discipline. Setting reserves honestly and conservatively (rather than optimistically) is non-negotiable. If reserves are set too low, a reinsurer can look profitable on paper and write more policies while quietly building up a shortfall; higher-than-expected claims later can then mean major financial trouble. For purposes of token NAV, reserves matter because more capital tied up in reserves means lower or slower-recognized NAV for reUSDe. ### Claim Lifecycle As claims mature and uncertainty declines, reserves can be released and previously deferred profit can be recognized, though adverse development can also move value the other way. Claims from different insurance products settle on different timelines. For example, property claims tend to settle quickly whereas workers' compensation claims can take years. The claims tail varies accordingly across reinsurance portfolios. Re specializes in lines with shorter, more predictable claims periods, where the process settles, and reserves are released, relatively quickly. ### IBNR IBNR stands for "Incurred But Not Reported." These are covered events that have already occurred but have not yet been reported to the insurer. Because the insurer doesn't yet know about them, their ultimate cost has to be modeled: an actuary estimates the probable volume and severity of unreported claims and sets aside reserves accordingly. IBNR is one major reason value at any given moment is an estimate rather than a perfectly exact number. A useful analogy is t-shirt sizing. Rather than measure each customer individually, a manufacturer sorts them into a handful of buckets (S, M, L, XL) calibrated against what's known about the population. The sizing isn't exact for any one person, but it's accurate enough to be useful. Actuaries do something similar with IBNR: they can't know each unreported claim, but they can bucket the exposure and reserve against it with reasonable confidence. ### What Duration Means in Practice Duration is the time it takes for a reinsurance contract to settle and for the capital behind it (reserves and regulatory capital or collateral) to be freed up. Duration depends heavily on the characteristics of the underlying line. In shorter-tail commercial property and selected liability lines (Re's primary areas of emphasis), claims tend to be reported and settled faster, which frees capital sooner. In lines such as workers' compensation, claims can emerge well after the policy period ends and often take years to settle, so capital unlocks much more slowly. This is why duration matters to holders: the shorter and more predictable the tail, the faster reserves convert back into capital that can earn yield, and the more efficiently the book translates underwriting profit into NAV growth. *** *For educational and informational purposes only. Nothing on this Site is investment, financial, legal, or tax advice, or an offer, solicitation, or recommendation to buy, sell, or hold any digital asset, including reUSD and reUSDe. Yields are not guaranteed and all figures are illustrative, not a promise of return; past performance is not a reliable indicator of future results. Digital assets involve significant risk, including total loss of principal — the Tokens are not bank deposits and are not insured by any government agency. The Tokens are available only to eligible non-U.S. persons in permitted jurisdictions and are subject to KYC/AML requirements. The binding terms of the applicable agreements govern and prevail over this summary. See our full* [*Disclosures*](https://re.xyz/disclosure) *for important additional information.*