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🛡️ '''Stop loss reinsurance''' is a form of [[Definition:Non-proportional reinsurance | non-proportional reinsurance]] that caps the total amount of [[Definition:Loss | losses]] a [[Definition:Cedent | ceding insurer]] must bear over a defined period, typically a policy or underwriting year. Rather than attaching to individual claims or individual risk events — as [[Definition:Excess of loss reinsurance | excess of loss]] treaties do — stop loss reinsurance triggers when the cedent's aggregate losses exceed a predetermined threshold, usually expressed as a [[Definition:Loss ratio | loss ratio]] percentage or a fixed monetary amount. It serves as a backstop against the cumulative weight of losses that, while individually manageable, could collectively erode an insurer's financial position.

⚙️ Under a stop loss treaty, the [[Definition:Reinsurer | reinsurer]] agrees to indemnify the ceding company for aggregate losses that breach the attachment point, up to a specified limit. For example, a primary insurer writing agricultural or health business might purchase stop loss protection that activates once its annual loss ratio surpasses 85%, with the reinsurer covering losses up to a 120% loss ratio ceiling. Pricing these contracts demands rigorous actuarial analysis of the cedent's historical loss distributions, [[Definition:Catastrophe model | catastrophe exposure]], and portfolio volatility, since the reinsurer is effectively underwriting the tail of the entire book's performance rather than any single event. Regulatory treatment varies: under [[Definition:Solvency II | Solvency II]], stop loss cover can reduce the [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] if it meets risk transfer tests, while [[Definition:US GAAP | US GAAP]] and [[Definition:Statutory accounting | statutory accounting]] rules in the United States impose their own criteria for recognizing the arrangement as genuine reinsurance rather than a financing mechanism.

📊 The strategic value of stop loss reinsurance lies in its ability to stabilize earnings and protect [[Definition:Surplus | surplus]] across volatile underwriting years. Lines of business prone to correlated or systemic losses — such as [[Definition:Crop insurance | crop insurance]], [[Definition:Health insurance | health insurance]], and [[Definition:Workers' compensation insurance | workers' compensation]] — are common candidates, because a single adverse season or trend can push aggregate results well beyond planned tolerances. For smaller and mid-tier insurers, stop loss coverage can be the difference between maintaining [[Definition:Rating agency | rating agency]] confidence and facing a downgrade after a poor year. It also supports disciplined capital management by allowing insurers to retain more business on a net basis while capping downside exposure, rather than ceding proportional shares of profitable premium to reinsurers through [[Definition:Quota share reinsurance | quota share]] arrangements. In markets like Japan and parts of Southeast Asia, where natural peril frequency can generate sustained attritional loss accumulation, stop loss structures play a particularly prominent role in reinsurance programs.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Aggregate excess of loss reinsurance]]
* [[Definition:Excess of loss reinsurance]]
* [[Definition:Non-proportional reinsurance]]
* [[Definition:Loss ratio]]
* [[Definition:Quota share reinsurance]]
* [[Definition:Reinsurance]]
{{Div col end}}

Definition:Stop loss reinsurance - Revision history

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