Self-Funded Risk Management
Stop-Loss Insurance
Stop-loss insurance is the financial safety net that makes self-funding viable for most employers. Understanding how it works — and what to watch for in the contract — is essential.
What It Is
Stop-loss insurance is a reinsurance product purchased by self-funded employers to cap their financial exposure from health plan claims. It does not replace the employer's obligation to pay claims — it reimburses the plan after claims exceed defined thresholds.
There are two forms: specific stop-loss, which protects against catastrophic individual claims, and aggregate stop-loss, which protects against a bad year across the entire covered population. Together, they define the maximum financial exposure the employer faces in any given plan year.
Stop-loss is not a commodity. Contract terms — the basis of coverage, lasering provisions, run-out periods, and carrier financial strength — vary significantly and have material consequences for plan exposure. Evaluating stop-loss on premium alone is one of the most common and costly mistakes in self-funding.
For most employers, stop-loss represents 15–25% of total self-funded plan cost. Optimizing attachment points, negotiating contract terms, and selecting financially strong carriers is a significant lever for both cost control and risk management.
Key Concepts
How Stop-Loss Insurance Works
Specific Stop-Loss
Reimburses the plan when a single member's claims exceed the specific deductible (attachment point) in a plan year. Protects against catastrophic individual claims.
Aggregate Stop-Loss
Reimburses the plan when total plan claims exceed the aggregate attachment point (typically 125% of expected claims). Protects against a bad year across the entire population.
Attachment Points
The specific deductible is the per-member threshold before stop-loss pays. Lower attachment points mean more protection but higher premiums. Common specific deductibles range from $50,000 to $500,000+.
Lasering
A carrier practice of excluding or applying a higher specific deductible to a known high-cost claimant at renewal. Lasering can significantly increase plan exposure and must be addressed in contract negotiations.
Contract Basis
Stop-loss contracts are written on either a "paid" or "incurred and paid" basis. The contract basis determines which claims are covered and in which policy year — a critical distinction for run-out claims.
Carrier Financial Strength
Stop-loss is only as good as the carrier's ability to pay. AM Best ratings, reinsurance arrangements, and claims-paying history are essential due diligence factors.
Why It Matters
Why It Matters for Employers
"A single catastrophic claim — cancer, premature birth, organ transplant — can exceed $1 million. Without stop-loss, that exposure falls entirely on the employer."
"Stop-loss premiums typically represent 15–25% of total self-funded plan cost. Optimizing attachment points and carrier selection is a significant cost lever."
"Lasering at renewal is one of the most common and costly surprises in self-funding. Employers who don't negotiate anti-lasering provisions face unpredictable exposure."
Common Pitfalls
Common Mistakes to Avoid
- 1
Choosing stop-loss based on premium alone without evaluating contract terms, lasering provisions, and carrier financial strength.
- 2
Failing to understand the contract basis (paid vs. incurred and paid) and how it affects run-out claim coverage.
- 3
Not negotiating anti-lasering provisions or maximum laser amounts before binding coverage.
- 4
Setting specific deductibles too high to save premium, leaving the plan exposed to mid-range catastrophic claims.
- 5
Failing to review stop-loss claims data annually to identify members approaching the specific deductible threshold.
FAQ
Frequently Asked Questions
Keep Learning
Related Resources
Resource Library
Employer Guides & Tools
Download checklists, calculators, and frameworks for self-funded plan management.
Browse resources →Blog
Health Reform Insights
Practical analysis of employer health plan strategy, stop-loss markets, and cost containment.
Read the blog →Related Pillar
Medical Captives
Explore how medical captives offer an alternative risk-financing structure for self-funded employers.
Learn about captives →Related topics
Stop-Loss & Risk Management Downloads
Ready to evaluate your stop-loss coverage?
Get an independent analysis of your stop-loss contract terms, attachment points, and carrier options.