Aggregate Excess Insurance

What Is Aggregate Excess Insurance?

Aggregate excess insurance limits the amount that a policyholder has to pay out over a specific time period. Also called stop-loss insurance, 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.

Understanding Aggregate Excess Insurance

Companies that self-insure are most likely to purchase this type of insurance coverage. The decision to set aside a pool of money to remedy an unexpected loss is based on the company’s estimated losses given its loss experience. However, it's also possible that the company one day experiences losses far higher than it anticipated to occur and is unable to cover the amount or unwilling to make the payout from its working capital.

To protect itself from this portion of loss, the self-insuring company could purchase aggregate excess loss insurance. Buying such a policy means covering the difference between the losses that it is able to effectively self-insure and the losses that it may experience during a catastrophe.

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 as a fixed dollar amount.

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, with anything over this limit considered the responsibility of the insurer.

The company has never experienced losses of $500,000 before. Then, all of a sudden, a number of its employees are injured after a machine malfunctions, triggering claims amounting to $750,000. The company is responsible for claims up to $500,000, while the remaining difference ($250,000) is the amount for which the insurer is responsible.

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.

That means that if the claims in the example above total $1.5 million, 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.