Aggregate Excess or Stop-Loss Reinsurance

NATURE, PURPOSE, AND BENEFITS                                 245
     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 or Runoff
IMPORTANT CLAUSES                                                         269
     Warranted Reinsurance

     Quota Share Reinsurance
SUITABILITY OF COVERAGE                                              272
SUMMARY                                                                               274


Aggregate Excess or Stop-Loss Reinsurance

by Thomas A. Lehrke *


     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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