GIM8090 | Reinsurance and other forms of risk transfer: types of reinsurance: non-proportional reinsurance: example of stop loss

An example of stop loss reinsurance is as follows.

A stop loss arrangement is entered into to pay up to 10 per cent of combined ratio (incurred loss inclusive of expenses/earned premium) in excess of 105 per cent.

If combined ratio is 98 per cent reinsured (cedant) has made 2 per cent profit, as a proportion of premium, so reinsurer pays nothing.

If combined ratio is 104 per cent reinsured (cedant) has made 4 per cent loss as a proportion of premium, which does not exceed 105 per cent so reinsurer pays nothing.

If combined ratio is 112 per cent reinsured (cedant) has made 12 per cent loss as a proportion of premium, which exceeds 105 per cent by 7 percentage points. Reinsurer pays loss equal to 7 per cent of the premium and cedant pays 5 per cent.

If combined ratio is 121 per cent reinsured (cedent) has made 21 per cent loss as a proportion of premium, which exceeds 105 per cent by 16 percentage points. Reinsurer pays 10 per cent of the combined ratio as that is the limit and insurer pays 11 per cent, comprising 5 per cent retention and 6 per cent above maximum reinsurance.