Definition for : First loss

The "first loss" designates the amount which is exposed first to any loss suffered on a portfolio of Assets, or on a single asset. The "first loss" mechanism is almost systematically used in the Insurance world and in the context of Securitisation. In an Insurance policy, the insurer will generally specify that the insured party first bear an un-insured amount of loss (also called a "Deductible"). In a Securitisation, the originator retains Exposure to the first loss incurred, which often corresponds to the historical losses incurred by the securitised Assets. The more important the first-loss tranche, the lower the Risk for the insurer or Investors.
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