STOP LOSS REINSURANCE
Stop Loss is one of the non-proportional reinsurance solutions.
In non-proportional reinsurance, there is an attachment point and a Limit. For example, if we have USD 90 million xs USD 10 million layer, then, USD 10 m is the attachment point. Any loss below USD 10 million has to be entirely borne by Reinsured. Losses above USD 10 million will be paid by Reinsurers. However, the maximum they pay will be USD 90 million, which is the limit bought in this example.
Stop Loss Reinsurance is Stopping the Loss Ratio reinsurance. This is usually bought for a portfolio. If a reinsured wants their Loss Ratio for Aviation Insurance portfolio to stop at 70%, they can buy a stop loss reinsurance with an attachment point of Loss Ratio 70%. Of course, Reinsurers cap the upper limit up to which Loss Ratio they pay.
Example could be 180 % LR xs 70% LR.
Let’s asssume the Premium is USD 100 m. If Losses are USD 60 m, reinsurers do not pay anything. If Losses are USD 100 million, reinsurers pay USD 30 million so that the loss ratio for the reinsured stops at 70%. If Losses are USD 200 million, reinsurers pay USD 130 million so that again the reinsured loss ratio stops at 70%. However, if losses are USD 500`million, then, reinsurers pay only USD 180 million because that is the limit of the cover. The remaining USD 250 million will fall back to the net account of the reinsured.
One question may come to our mind. If such an excellent reinsurance solution is available, then, any reinsured can buy Stop Loss Reinsurance and ensure that they are always making Underwriting Profit. It needs to be understood that Stop Loss reinsurance comes at a cost. Based on analysis of past data, if loss ratio is predictable, then, very difficult for reinsured and reinsurers to come to an agreement on the attachment point. However, for a highly volatile portfolio’s where loss ratios can vary substantially, Stop Loss reinsurance can be good solution. Examples could be property portfolio concentrated with energy risks or a Crop Portfolio or an Aviation Portfolio. It is never a good solution for stable portfolios.
It needs to be understood that many times, reinsurers are not ready to pay 100% of the losses above the attachment point and expect the reinsured to participate even in the covered layer. In the above example, reinsurers may say we pay 90% of 180% LR xs 70% LR. It means, if the premium is USD 100 m and Losses are USD 200 million, then reinsurers will pay 90% of USD 130 million = USD 117 million. The remaining USD 13 million will have to be borne by the reinsured. The loss ratio will not stop at 70% in this case but will go up to 83%.
In India, most insurers of Crop Insurance buy Quota Share plus Stop Loss Reinsurance.
Blog by Atmaram Cheruvu
