Stop Loss
Aggregate reinsurance that caps the cedent's total losses over a policy period at a specified amount or loss ratio.
What It Is
Stop loss reinsurance, also called aggregate excess of loss, protects the cedent against the cumulative total of losses over a defined period (typically one year) exceeding a specified threshold. The threshold is usually expressed as a loss ratio or a dollar amount. Once the cedent's total losses exceed the stop loss attachment point, the reinsurer pays the excess up to the treaty limit.
For example, a stop loss treaty might attach at a 75% loss ratio and provide protection up to a 120% loss ratio. If the cedent earns $100M in premium and incurs $90M in losses (90% loss ratio), the stop loss treaty pays the $15M difference between the 75% attachment ($75M) and the actual losses ($90M), capping the cedent's loss ratio at 75% for the covered portion.
Stop loss is less common than per-risk or per-occurrence excess of loss because it covers attritional loss aggregation, which reinsurers consider harder to price and more subject to moral hazard (the cedent might relax underwriting if aggregate losses are capped). Stop loss treaties often include corridor provisions, retention co-participation, and loss-ratio caps that limit the cedent's recovery and maintain the cedent's incentive to manage losses.
Why It Matters for Brokers
Stop loss concepts appear in the primary insurance market through aggregate deductibles and loss-sensitive programs that brokers place for larger commercial accounts. Understanding how aggregate stop loss works at the reinsurance level helps brokers design and explain similar structures at the primary level, such as aggregate corridors in large-deductible workers compensation programs.
Real-World Example
A mid-size carrier with $60M in workers compensation premium purchases stop loss reinsurance attaching at a 70% loss ratio ($42M) with a limit up to 100% ($60M). In a year with several severe claims, the carrier's incurred losses reach $52M (87% loss ratio). The stop loss treaty pays $10M ($52M minus $42M), reducing the carrier's effective loss ratio to 70%. Without the stop loss, the carrier's combined ratio would have been 117%, threatening its financial stability.
Common Mistakes
- 1Confusing per-occurrence excess of loss with stop loss; per-occurrence covers single-event peaks while stop loss covers aggregate accumulation over a period.
- 2Not understanding that stop loss availability and pricing affect carrier financial stability, which in turn affects the carrier's ability to compete for business.
How brokerageaudit.com Handles This
brokerageaudit.com incorporates carrier financial stability analysis including known reinsurance structures to help brokers evaluate the true risk-bearing capacity of their carrier partners, ensuring clients' coverage is backed by adequately protected carriers.