HPS Blog for Brokers

The Basics of Stop-Loss Insurance

The Basics of Stop-Loss Reinsurance

Many employers are curious about self- or level-funding, but concerned about the increased risk. Stop-loss insurance exists to reduce this risk and protect the employer from catastrophic claims. This blog post will explain what stop-loss is and the benefits it offers.


What is Stop-Loss Insurance?

Stop-loss protects the organization from extremely large individual (per loss) claims, helping organizations protect cash flow. Catastrophic claims are covered by stop-loss, rather than paid directly by the employer.

The cost of stop-loss coverage is determined by analyzing prior claims, demographics, location, network, etc. Stop-loss premiums may increase for future years based on the number of catastrophic claims incurred during previous plan years.

For example, if an employee has cancer and incurs claims that require stop-loss to kick in, the stop-loss company may charge more to cover that employee in future years, or require that employee to have a higher maximum amount of claims before stop-loss kicks in; this affects the cost of the plan for the entire company, rather than just the one employee—this is called lasering.

Stop-loss companies set maximum stop-loss insurance amounts per incident. The most common maximum amount is $1,000,000. About 12-15% of claims reach the stop-loss limit.

Learning the ins and outs of stop-loss is a must for organizations switching to self- or level-funding.


Stop-Loss Insurance for Self-Funded Plans

Organizations choosing to self-fund their employee benefits accept greater risk and must protect themselves against the potential of catastrophic claims. Stop-loss coverage ensures that if a specific incident or claim incurs costs greater than the predetermined amount, the employer will not be responsible for the entirety of the claim. By investing in stop-loss coverage, employers of all size can be more confident in choosing self-funded or level-funded benefits plans.

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