Those organisations who have a significant self-insured retention on the Casualty/Motor policies will usually also have an Aggregate Stop Limit (ASL) applied to these polices. These policies may also be referred to as Aggregate Self-Insured Retention.
The ASL effectively acts as safety-valve for organisations by placing a limit on an organisation’s exposure to uncapped losses within the self-insured retention. This provides the organisation with budgeting certainty otherwise missing if a cap did not exist.
The ASL is calculated by insurers based on the ground-up claims experience of the organisation, using the claims volume and self-insured costs over a period of several years to model possible future loss trends. The ASL will always be biased towards the insurer, as it should be a rare occurrence for the ASL to be breached. It is after all a safety value and not an expansion chamber to give it an engineering analogy.
How the ASL works in practice will depend on the specific wording which is applied by the insurer, and like any policy condition it is important that organisations understand how it will operate if breached. However, in simple terms, once the retained elements of all claims within one period of insurance, in total ( sometimes referred to as “in the aggregate”), reaches the ASL, the self-insured retention is then either significantly reduced or even waived for further claims in that period of insurance.
Some less familiar terms used in insurers ASL wordings are:-
- Non-Ranking Excess: in some instances, certain losses may not count towards the ASL. These are called Non-Ranking Excess. It is important to understand why these losses are being excluded and what impact this may have on your organisation.
- Index Linking: with policies under a long term agreement, insurers may require the ASL to be index-linked at each renewal to allow for the effects of claims inflation. It is important to remember this when reviewing an organisation’s position to the ASL over a period of time.
Organisations with an ASL on their Casualty or Motor policies will often have authority from the insurer to self-handle claims within defined parameters. Whilst this will allow the organisation to handle smaller or less serious claims, it is important that the organisation’s claims team are operating within their authority and reserving correctly to ensure that the total claims cost within any one period of insurance is correctly calculated.
Quarterly claims reports are usually required by insurers where self-handling authority has been granted to enable insurers to understand the developing claims position. Insurers will monitor the continuing claims performance against past history, premium paid and the ASL.
However, the organisation should themselves be monitoring their claims costs so that they too have a good understanding of how their claims experience is developing and the impact on their reserves.
Should the organisation start to approach the ASL figure for a particular period of insurance, they will need to pay much closer attention to future claims and be prepared to ensure that the lower, or waived, retention is applied correctly should the ASL has be breached.
If an organisation finds that it is approaching, or has breached, the ASL, it is important that early dialogue is held with the insurers. This will mitigate the risk of the insurer choosing to impose additional terms or increased premium requirements at next renewal.
Gallagher have significant experience of advising clients with an ASL. Please contact your regular Gallagher representative if you would like to discuss management of an ASL.