Distinguish between ‘Stop-Loss Reinsurance’ and ‘Excess of Loss Reinsurance’

Stop-Loss Reinsurance:

Get the full solved assignment PDF of MECE-003 of 2023-24 session now.

1. Definition:

• Stop-loss reinsurance, also known as specific excess of loss reinsurance, provides coverage for a single policy or risk exceeding a predetermined retention or “stop-loss” level.

1. Trigger:

• It is triggered when the losses on a specific policy or risk exceed the agreed-upon retention level set by the ceding insurance company.

1. Scope:

• Coverage is specific to individual risks or policies that surpass the predetermined threshold.

1. Limit:

• The reinsurance coverage has a specific limit for each policy or risk, and once that limit is reached, the reinsurer assumes responsibility for the additional losses.

Excess of Loss Reinsurance:

1. Definition:

• Excess of loss reinsurance provides coverage for the aggregate losses that exceed a certain threshold, which could be based on the cumulative losses of multiple policies or the total losses of the ceding company over a specific period.

1. Trigger:

• It is triggered when the cumulative losses of the ceding company surpass the agreed-upon threshold, regardless of whether the losses are from a single large event or the accumulation of multiple smaller events.

1. Scope:

• Coverage is broader, addressing cumulative losses from multiple policies or events that collectively exceed the specified threshold.

1. Limit:

• The reinsurance coverage typically has an aggregate limit for the entire portfolio or a specified time period, and the reinsurer assumes responsibility for losses beyond that limit.

In summary, stop-loss reinsurance is specific to individual policies or risks, triggered when losses exceed a predetermined level for each, while excess of loss reinsurance provides coverage for aggregate losses, triggered by the cumulative losses of the ceding company surpassing a specified threshold.