Stop Loss with Loss Ratios as its Limits

[Kunjesh Parikh]

Does stop Loss cover only the policies that are written already at the time the reinsurance treaty is entered into? If not, then if the insurer writes policies after signing the treaty at intentionally low rates, then although it will be generating more premium income and hence increasing the excess limit and the upper point, but the increase will not be sufficient enough as the rates have been reduced and so the reinsurer will be at a disadvantage as the excess point is more likely to be breached than before. How does writing stop Loss with limits defined in terms of percentages help here then?

 

[GemmaHayes]

That seems to be the danger alright and why Stop Loss is particularly expensive or unavailable when the market is soft. The reinsurer is at risk of the moral hazard of the insurer action you stated and poor claims handling and underwriting practices. Historically, stop loss has been loss making for the reasons you stated as most insurers want it in soft markets and most reinsurers want to avoid it. If an insurer was to act irresponsibly it would be black listed and find it hard to attain reinsurance in the future as it may be refused reinsurance.
The upper limit for the percentage of premium would mitigate the maximum losses incurred at least and reduce the moral hazard as they would share the pain of the loss making rates.