Which statement describes a stop-loss contract basis?

Which statement describes a stop-loss contract basis?

• A. Incurred claims on the left and paid claims on the right.
• B. Paid claims on the left and incurred claims on the right.
• C. Both sides show paid claims.
• D. The contract basis has nothing to do with claims timing.

Answer: (A)

The key idea is how stop‑loss coverage measures losses over time. In this contract basis, losses are tracked with incurred losses on the left and paid losses on the right. Incurred losses include all losses that have occurred, combining both amounts already paid and reserves for claims that are not yet settled (and IBNR). This provides a fuller, more prudent view of total liability and ensures the stop‑loss protection activates based on the true economic cost, not just cash outlays. Paid losses on the right reflect the actual cash that has left the insurer, illustrating real payments to date. If the left side used paid losses, or the right side used incurred losses, the measurement would understate or misalign with the insurer’s exposure and reserve posture.

The key idea is how stop‑loss coverage measures losses over time. In this contract basis, losses are tracked with incurred losses on the left and paid losses on the right. Incurred losses include all losses that have occurred, combining both amounts already paid and reserves for claims that are not yet settled (and IBNR). This provides a fuller, more prudent view of total liability and ensures the stop‑loss protection activates based on the true economic cost, not just cash outlays. Paid losses on the right reflect the actual cash that has left the insurer, illustrating real payments to date. If the left side used paid losses, or the right side used incurred losses, the measurement would understate or misalign with the insurer’s exposure and reserve posture.