Aggregate Stop-Loss Reinsurance

In aggregate stop-loss reinsurance, losses over a specific amount are covered solely by the reinsurer and not by the ceding company. Aggregate stop-loss reinsurance caps the aggregate amount of losses for which a ceding company is responsible. This cap is called the attachment point, and it only applies when the value of claims occurrences reaches the attachment point.

Aggregate stop-loss reinsurance contracts indemnify the reinsured for losses over a specific amount (called the attachment point) to the reinsurer. When an insurance company underwrites a new policy, it accepts the risk that claims may be filed by a policyholder, in exchange for a premium. State regulators limit the amount of risk that an insurer can take on and require insurance companies to set aside a loss reserve to cover potential claims. One way that insurers can reduce their overall risk is to work with reinsurers. In exchange for a fee, reinsurers will accept the risk ceded to them by the insurer.

Reinsurance contracts often contain language that limits the amount of claims for which a reinsurer will be responsible. This may be a fixed amount of loss, or may be a percentage of losses. The attachment point is linked to factors that influence the loss experience, such as how many losses have been incurred over a specific period of time, the risk profile of policyholders and demographic trends.

For example, an insurance company enters into an aggregate stop-loss reinsurance contract with a reinsurance company. The contract indicates that the insurance company is responsible for losses up to $500,000, but that the reinsurance company is responsible for anything above that limit. If the claims total $750,000, the reinsurer would be responsible for $250,000.

Aggregate stop-loss reinsurance contracts can be risky propositions for reinsurance companies, as it requires them to cover all losses over a certain amount. If an insurance company experiences a sharp increase in the severity of claims, such as from a catastrophe, the reinsurer could potentially cover a large amount of losses on its own. Because of this risk, reinsurers typically charge a high fee for this type of coverage and are likely to set the attachment point at a multiple over an insurance company’s typical loss experience. Sometimes, reinsurers will require some form of co-participation by the reinsured to be applied to the reinsurer's limit. In such case, the reinsurance may only cover 90 or 95 percent of the excess loss.