stop-loss (aggregate) reinsurance

Excess of loss protects against one big claim or one big event. But sometimes the danger is not a single catastrophe — it is a whole year that simply goes wrong: a wet summer that floods a thousand basements, a flu season that triples health claims, a string of ordinary losses that, added up, blow past the budget. Stop-loss reinsurance protects against exactly that. It looks at the cedant's total claims for the whole year and steps in once that total exceeds a chosen level, regardless of how many individual claims made it up.

Stop-loss is the aggregate cousin of excess of loss: the attachment and limit are stated on the year's total losses (often as a percentage of premium, called a loss ratio) rather than on any single loss. For example, a treaty might cover losses between 105 percent and 130 percent of premium. If the year's losses come in at 90 percent of premium, the reinsurer pays nothing; at 120 percent it pays the slice from 105 to 120, or 15 percent of premium; at 140 percent it pays its full layer, 105 to 130, and the cedant absorbs the rest above 130 percent. It is a cap on how bad the whole year's underwriting result can get.

Stop-loss is the closest reinsurance comes to a pure earnings guarantee, which is why reinsurers price it cautiously and usually cap their payout and add features that keep the cedant with some skin in the game. The danger for the reinsurer is moral hazard and adverse selection: if a cedant knew its results were sliding, it might lean harder on a stop-loss to bail out poor underwriting, so reinsurers watch closely and often insist the attachment sit above the level where a normal bad year would land. A common misconception is that stop-loss caps every conceivable loss — in fact, above the upper limit the cedant is fully exposed again, so a truly disastrous year still pierces the top of the cover.