What Is Aggregate Excess Insurance?

Also called stop-loss insurance, an aggregate excess insurance policy limits the amount that a policyholder has to pay out over a specific time period. It is designed to protect policyholders who experience an unusually high level of claims that are considered unexpected.

Aggregate excess insurance provides payment for total losses that occur over a period of time and is not limited to a per-occurrence basis.

Key Takeaways

  • Aggregate excess insurance policies limit the amount a policyholder has to pay out over a specific period.
  • Companies that self-insure are most likely to purchase this type of insurance coverage.
  • Aggregate excess insurance is also called stop-loss insurance.
  • The excess loss limit may be expressed as a percentage of total expected losses or as a fixed dollar amount.

Understanding Aggregate Excess Insurance

The excess loss limit, called the loss fund, is set by the insurance company. It may be calculated in a number of ways. Generally, these methods take into account the amount of losses that the policyholder has experienced over time, changes to the insured’s risk profile, as well as adjustments from actuarial analysis.

The limit may be expressed as a percentage of total expected losses, or may be expressed as a fixed dollar amount.

Real World Example of Aggregate Loss Insurance

An employer purchases a workers’ compensation policy with aggregate excess coverage. The maximum amount that the company is responsible for is $500,000, and anything over this limit is considered the responsibility of the insurer.

The company has never experienced losses of $500,000 before. A number of the companies of employees are injured after a machine malfunctions, with the resulting claims amounting to $750,000. The company is responsible for claims up to $500,000, but the remaining difference ($250,000) is the amount for which the insurer is responsible.

Companies that self-insure are most likely to purchase this type of insurance coverage. The decision to self-insure is based on the company’s estimated losses given its loss experience, but if losses are far higher than expected the company may not be able to cover the amount or may not wish to make the payout from its working capital.

To cover itself from this portion of loss, the self-insuring company purchases aggregate excess loss insurance to cover the difference between the amounts of the losses that it is able to effectively self-insure and the amounts of losses in total that it may experience during a catastrophe.

The insurer that writes the aggregate excess policy may want to hand off some of the risk as well, to what's known as a reinsurance company. The contract indicates that the insurance company is responsible for losses up to $500,000, but that the reinsurance company is responsible for anything above a stated limit, say $1 million and above.

If the claims total $1.5 million in this example, the company that took the policy pays the first $500,000, the aggregate insurer pays the next $500,000 and the reinsurer pays the final $500,000.