> 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/risk-controls-and-what-can-go-wrong/risk-limits-and-controls.md).
# Risk limits & controls
Prudent reinsurers use a layered set of limits and controls to keep any single event or counterparty from threatening the portfolio. Cover Re SPC Ltd. applies these at the front end of underwriting (what gets bound and on what terms) and at the back end (how the resulting exposure is structured and laid off).
## Diversification
The largest single source of risk in a reinsurance portfolio is the business written, and diversification is the first defense. Cover Re SPC Ltd. spreads exposure across geography, across perils and causes of loss, and across the business operations of the cedents it supports. Geography matters for property catastrophe for obvious reasons (a hurricane in Florida is not a hurricane in Texas), but it also matters for casualty, where the jurisdiction of a lawsuit drives the outcome as much as the underlying facts. Operational mix matters because contractor business, restaurant business, and retail business each respond differently to macroeconomic cycles and have different claim drivers.
## Exposure limits
Re caps how much premium and how much limit any single contract can represent within the portfolio, and carefully manages the ratio of premium to limits within each contract. A book that collects $10M of premium against $10M of policy limits is one loss away from being wiped out. Keeping that ratio balanced, within thresholds we set internally, is what prevents any single claim from threatening the broader portfolio.
## Collateral policy
Regulatory collateral supporting our reinsurance contracts is held in ring-fenced trusts. This protects ceding insurers and isolates the collateral from general liquidity demands.
## Contract structure
Reinsurance contracts themselves can be written with structural caps on loss. We use aggregate limits on catastrophe exposure and overall treaty limits on total loss recoverable. These features make sure that no single treaty, regardless of how the underlying business performs, can blow up the broader portfolio.
## Retrocession
After the front-end controls and the contract structuring, the residual tail risk that remains can be transferred through retrocession, which is reinsurance bought by reinsurers. Retrocession is how we move severe tail outcomes off our balance sheet.
## Stress tests
Every contract Cover Re SPC Ltd. writes is modeled for volatility, which produces a full distribution of outcomes for the position. From that distribution we can read what our result would be at the 99th percentile, the 99.9th percentile, and beyond. The output is not itself a risk mitigant; it is a tool that informs the rest of the framework: how much capital we need to hold to survive a given severity, how much retrocession we should buy and at what attachment, and which business we should avoid if the capital cost of carrying it is too high. No reinsurer can hold enough capital to survive every conceivable scenario short of holding infinite capital, so the question stress testing answers is where to set the risk tolerance, and how to spend capital and retrocession against that tolerance.
## Risk register
Cover Re SPC Ltd. maintains a risk register: a ledger of known risks, who owns them, what action is being taken on each (avoid, mitigate, or transfer), and how likely and how severe each is. The register is reviewed on a regular cadence to catch new risks as they emerge and to retire ones that no longer apply.
For a pure reinsurance operation, the categories on the register are well established: asset and market risk, interest rate risk, foreign exchange risk, credit and counterparty risk, underwriting risk, reserve risk, catastrophe risk, and operational risk. Underwriting risk and catastrophe risk are typically the largest of these. Operational risk tends to be small.
Re's structure adds a second layer. Because the protocol issues yield-bearing stablecoins backed by collateral that sits behind the reinsurance contracts, the register also covers risks specific to a DeFi-native issuer: smart contract risk, custody and chain-of-control risk, infrastructure and security risk, and the integrity of the data feeds the protocol relies on. These sit alongside the reinsurance categories rather than replacing them.
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\ *Cover Re SPC is unaffiliated with Resilience Foundation. The protocol governs token issuance and capital routing. The reinsurer operates independently under CIMA oversight.*