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A2B Advantages and disadvantages of stop loss treaties
Advantages
As we saw in example 5.9, stop loss reinsurance guarantees to meet retained losses which exceed a
Gives the insurer a
degree of certainty pre-agreed percentage or amount of the insurer’s net retained income up to a further predetermined
that its overall claims percentage or amount. It, therefore, gives the insurer a degree of certainty that its overall claims
experience will be
capped experience will be capped at a pre-selected loss ratio assuming, of course, that it has purchased
sufficient reinsurance protection.
Disadvantages
Stop loss is unlikely to be available for motor and liability types because the long-tail nature of claims
makes it difficult to take a view on how the account protected has actually performed in the short- to
medium-term. Furthermore, the insurer’s options are limited because cover is usually only applied to
losses in excess of 100% of premium income and so a substantial loss has to be sustained before
reinsurance protection becomes effective. Cover is also applied with an upper limit and sometimes with
co-insurance. There is a limited market for stop loss and it may only be available for certain types of risk,
such as crop hail insurance.

Co-insurance
Where cover is applied with co-insurance, the insurer participates in the loss which would otherwise have been
wholly passed to the reinsurer. The use of co-insurance is expressed, for example, as follows:
90% of 50% of GNRPI excess of 105% GNRPI
Here, the insurer contributes 10% to the reinsurer’s exposure in the range of 0-50% of losses greater than 105% of
5 the insurer’s GNRPI.
Chapter

A3 Aggregate excess of loss treaty

While stop loss operates based on pre-agreed percentages, aggregate excess of loss cover has limits
A form of excess of
loss reinsurance that are expressed only as fixed amounts. The similarity is that both set out to limit or reduce the
aggregation of claims within predetermined boundaries over a period of time, usually annually. Reference copy for CII Face to Face Training
Aggregate excess of loss is a form of excess of loss reinsurance that covers the aggregate of losses,
above an excess point and subject to an upper limit, sustained from a single event or from a defined
peril, or perils, over a defined period, usually one year. In essence, it is an excess of loss treaty
reinsurance under which the reinsurer responds when a reinsured incurs losses on a particular line of
business during a specified period in excess of a stated amount.

Aggregate excess of loss contract limits are expressed in monetary terms, say, $2.5m in the aggregate
excess of $5.25m in the aggregate and all losses affecting the account are aggregated to ascertain any
potential excess of loss recovery against those contract limits.

Example 5.10
The reinsurer indemnifies a US insurance company for an aggregate, or cumulative, amount of losses in excess of a
specified aggregate amount. This can be written excess of $1m in the aggregate excess of $1m in the aggregate.
There might also be an inner deductible to apply only to losses excess of a stated dollar amount. This would be
expressed as $1m in the aggregate excess of $1m in the aggregate applying only to losses greater than $100,000
per loss.

A3A Use of aggregate excess of loss treaties

They would be used to protect the insurer’s net absolute retained account against attritional losses that
are relatively small in size but have a potentially substantial impact on overall loss ratios.

A3B Advantages and disadvantages of aggregate excess of loss treaties

Advantages
Aggregate excess of loss treaties provide a corridor of protection over the insurer’s expected results in
Provides a corridor of
protection exchange for a fixed premium. In addition, they may incorporate refunds in premium if the insurer
delivers good results to the reinsurer. They provide aggregate protection of underwriting results. Finally,
they ‘take the sting out of’ an above-average net loss ratio.