Aggregate stop loss reinsurance ($S_I=\min (S,M)$)

With aggregate retention $M\ge 0$, the direct insurer pays $\min (S,M)$ and the reinsurer pays $(S-M{)}_{+}$, where $+$ denotes the positive part. The threshold applies to the whole annual loss; applying a threshold to individual claims is a different contract.

If $S$ has exponential distribution with expected value $\mu$, the tail integral formula for moments gives $\mathbb{E}\min (S,M)=\mu (1-e^{-m})$ and $\mathrm{Var}(\min (S,M))={\mu }^2(1-2m{e}^{-m}-e^{-2m})$, where $m=M/\mu$. At matching retained expected value, the excess variance under quota share reinsurance is $2{\mu }^2{e}^{-m}(m-1+e^{-m})\ge 0$.

Among retained payouts $g(S)$ with $0\le g(x)\le x$ and the same expected value as $\min (S,M)$, aggregate stop loss reinsurance minimizes the variance. Pointwise $(g(x)-M{)}^2\ge (\min (x,M)-M{)}^2$, and subtracting the identical squared distance of their common expected value from $M$ proves the claim. Equality requires equal payouts almost surely.