Stop Loss Reinsurance. A New Look

Abstract

This paper analyzes the prevailing theoretical excess of loss ratio reinsurance rating model, noting the limitations of this basic model. Improvements in stop loss reinsurance rating are proposed to reflect the dynamic changes now taking place in underlying insurance premium structures. The authors propose that a theoretical claim distribution curve, composed of: potential changes in the class of risk assumed, increases or decreases in loss payments, managerial attitudes towards claims settlements, and testing the validity of the reported data, be superimposed upon the traditional (ceteris paribus) loss history model. An actuarial model for estimating the expected value of reinsurance is developed. The authors attempt to show in their model that traditional static loss ratio theory is ineffective in forecasting future trends. Reinsurance, as both a practical and an academic subject, is considerably more involved than ordinary forms of insurance. This may result from the fact that there is no set formula in matters of reinsurance practice and, as such, it frequently enters into the arena of theoretical and empirical