Takaful - Excess of Loss vs Stop Loss Retakaful

Concise Overview

Both Excess of Loss and Stop Loss are non-proportional Retakaful arrangements. The main difference is that Excess of Loss looks at the size of an individual loss, while Stop Loss looks at the total claims or loss ratio for the whole portfolio over a period, usually one year.

1. Excess of Loss Retakaful

Under Excess of Loss, the Takaful operator first bears each individual claim up to an agreed retention limit. The Retakaful operator only pays when a particular loss exceeds that limit.

Example

Suppose:

Takaful retention = RM1 million

Retakaful cover = RM4 million

A factory suffers a covered loss of:

RM3 million

The Takaful operator pays:

First RM1 million

The Retakaful operator pays:

RM2 million

So:

RM3m claim = RM1m Takaful + RM2m Retakaful

If another claim is only:

RM700,000

the Retakaful operator pays nothing because the claim does not exceed the RM1 million retention.

Simple Idea

Excess of Loss asks:

“How big is this individual claim?”

If the individual claim exceeds the retention, Retakaful becomes involved.

2. Stop Loss Retakaful

Under Stop Loss, the Retakaful operator does not normally look at whether one individual claim is large or small. Instead, it looks at the total claims for the whole portfolio during the year.

The Retakaful operator begins paying only when the total annual loss ratio exceeds an agreed percentage.

Example

Suppose the Takaful operator receives:

RM10 million in contributions

The stop-loss threshold is:

70%

Therefore:

70% × RM10m = RM7 million

The Takaful operator bears total annual claims up to RM7 million.

If total claims for the year are:

RM6 million

Loss ratio:

RM6m ÷ RM10m = 60%

Since this is below 70%:

Retakaful pays nothing.

If total annual claims become:

RM9 million

Loss ratio:

90%

The Takaful operator bears:

RM7 million

The Retakaful operator may cover:

RM2 million

subject to the agreed maximum.

Simple Idea

Stop Loss asks:

“How high are the total claims for the whole year?”

Main Difference

Excess of Loss

Focuses on:

One individual large claim

Example:

RM3m claim

Retention RM1m

→ Retakaful pays RM2m

Stop Loss

Focuses on:

Total claims for the whole portfolio

Example:

Annual contributions RM10m

Stop-loss threshold 70% = RM7m

Annual claims RM9m

→ Retakaful may pay RM2m

Example Showing the Difference Clearly

Suppose there are 100 separate claims of RM100,000 each.

Total claims:

100 × RM100,000 = RM10 million

Under Excess of Loss

If the retention per claim is:

RM1 million

Each RM100,000 claim is below RM1 million.

Therefore:

Retakaful pays RM0

even though total claims are RM10 million.

Under Stop Loss

Suppose annual contributions are:

RM10 million

and the stop-loss threshold is:

70% = RM7 million

Total claims are RM10 million.

Therefore:

Retakaful may cover RM3 million

subject to the agreed limit.

This shows the key distinction:

Excess of Loss cares about each claim individually.

Stop Loss cares about the total annual claims.

Easy Way to Remember

Excess of Loss = One claim becomes too large

Stop Loss = The whole year becomes too bad

Simple Formula

Excess of Loss

Individual Claim

− Retention

= Retakaful payment, subject to limit

Stop Loss

Total Annual Claims

− Agreed Annual Threshold

= Retakaful payment, subject to limit