What does Stop Loss Reinsurance primarily protect against?

Stop Loss Reinsurance is specifically designed to provide protection to insurers against low frequency but high severity claims. This type of reinsurance coverage kicks in once the losses exceed a certain threshold, helping an insurer manage the financial impact of unexpected, significant claims that could jeopardize their financial stability.

The nature of Stop Loss Reinsurance means that it focuses on the larger, less frequent claims that can result in substantial financial losses. This is crucial for insurers as it helps stabilize their loss ratios and ensures that they can continue to operate effectively, even in the face of severe claims. The mechanism of this reinsurance is structured to absorb unexpected losses after reaching a predetermined level, which allows for better risk management in situations where a few claims could drastically affect an insurer’s financial health.

The other options, while relevant to various aspects of insurance and risk management, do not capture the primary purpose of Stop Loss Reinsurance as effectively as this one.