Aggregate Excess or Stop-Loss Reinsurance

6
Outline
Aggregate Excess or Stop-Loss Reinsurance
NATURE, PURPOSE, AND BENEFITS 245
CRITERIA FOR ESTABLISHING
RETENTION AND LIMIT 255
Reinsured's Retention
Insurance Underwriting Experience
Reinsurance Limit Desired
Strength of Inuring Reinsurance
Primary Insurance Pricing Validity
Alternatives: The Greater of Percentage of Premium
or Dollar Amount
Declining SNEPI
Increasing SNEPI
Reinsurer's Limit
The Lesser of Percentage of Premium or Dollar Amount
Other Underwriting Considerations and Queries
PRICING 263
LOSS SETTLEMENT PROVISIONS 268
Cutoff
Runoff
Cutoff or Runoff
IMPORTANT CLAUSES 269
Warranted Reinsurance
Quota Share Reinsurance
SUITABILITY OF COVERAGE 272
SUMMARY 274

6
Aggregate Excess or Stop-Loss Reinsurance
by Thomas A. Lehrke *
NATURE, PURPOSE AND BENEFITS
In general, aggregate excess of loss or stop-loss reinsurance is a form of reinsurance coverage for an insurance company that deals with the accumulation of the reinsured's net loss position over a specified period of time, usually one calendar year. As is true with any form of excess of loss reinsurance, the reinsurance agreement includes a loss retention (for the reinsured) and a limit (for the reinsurer) of reinsurance.
Generally, the reinsured's retention is stated in one of two ways -- either as a flat dollar amount, or as a percentage of annual subject insurance premium (i.e., the premium affected by the reinsurance). Often, if the retention is specified as a flat dollar amount, the agreement is referred to as an aggregate contract; if the retention is specified as a percentage of annual subject premium, the contract is referred to as a stop-loss contract. Similarly, the reinsurer's limit may be stated as a flat dollar amount or as a percentage of annual subject premium.
Reinsurers of aggregate and stop-loss contracts will typically require some form of co-participation by the reinsured to be applied to the reinsurer's limit. Therefore, these covers generally apply for 90% or 95% of the excess loss. The purpose of the co-participation is to keep the reinsured involved in equitable loss settlement even after the loss has moved above the retention level.
One unique feature of aggregate or stop-loss reinsurance is that it deals with the net loss experience of the reinsured. Therefore, any benefit from the balance of a reinsured's reinsurance program (whether it be proportional or nonproportional) is treated as inuring to the benefit of the reinsurance, which is then applied against gross subject losses to determine whether an aggregate or stop-loss recovery is due the

* M.B.A., President, W.J. LEHRKE CO., 6600 France Avenue south, Edina MN 55435. An autobiography follows the chapter.

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		6 *Outline* Aggregate Excess or Stop-Loss Reinsurance NATURE, PURPOSE, AND BENEFITS 245 CRITERIA FOR ESTABLISHING RETENTION AND LIMIT 255 Reinsured's Retention Insurance Underwriting Experience Reinsurance Limit Desired Strength of Inuring Reinsurance Primary Insurance Pricing Validity Alternatives: The Greater of Percentage of Premium or Dollar Amount Declining SNEPI Increasing SNEPI Reinsurer's Limit The Lesser of Percentage of Premium or Dollar Amount Other Underwriting Considerations and Queries PRICING 263 LOSS SETTLEMENT PROVISIONS 268 Cutoff Runoff Cutoff or Runoff IMPORTANT CLAUSES 269 Warranted Reinsurance Quota Share Reinsurance SUITABILITY OF COVERAGE 272 SUMMARY 274
	6 Aggregate Excess or Stop-Loss Reinsurance by Thomas A. Lehrke * NATURE, PURPOSE AND BENEFITS In general, aggregate excess of loss or stop-loss reinsurance is a form of reinsurance coverage for an insurance company that deals with the accumulation of the reinsured's net loss position over a specified period of time, usually one calendar year. As is true with any form of excess of loss reinsurance, the reinsurance agreement includes a loss retention (for the reinsured) and a limit (for the reinsurer) of reinsurance. Generally, the reinsured's retention is stated in one of two ways -- either as a flat dollar amount, or as a percentage of annual subject insurance premium (i.e., the premium affected by the reinsurance). Often, if the retention is specified as a flat dollar amount, the agreement is referred to as an aggregate contract; if the retention is specified as a percentage of annual subject premium, the contract is referred to as a stop-loss contract. Similarly, the reinsurer's limit may be stated as a flat dollar amount or as a percentage of annual subject premium. Reinsurers of aggregate and stop-loss contracts will typically require some form of co-participation by the reinsured to be applied to the reinsurer's limit. Therefore, these covers generally apply for 90% or 95% of the excess loss. The purpose of the co-participation is to keep the reinsured involved in equitable loss settlement even after the loss has moved above the retention level. One unique feature of aggregate or stop-loss reinsurance is that it deals with the net loss experience of the reinsured. Therefore, any benefit from the balance of a reinsured's reinsurance program (whether it be proportional or nonproportional) is treated as inuring to the benefit of the reinsurance, which is then applied against gross subject losses to determine whether an aggregate or stop-loss recovery is due the * M.B.A., President, W.J. LEHRKE CO., 6600 France Avenue south, Edina MN 55435. An autobiography follows the chapter.