Stop-loss insurance (also known as excess insurance) is a product that provides protection against catastrophic or unpredictable losses. It is purchased by employers who have decided to self-fund their employee benefit plans, but do not want to assume 100% of the liability for losses arising from the plans. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles.
According to the Mercer Annual Survey of Employers, 20% of employers are currently self-funding their benefits.
There are two types of self-funded insurance:
The form of excess risk coverage that provides protection for the employer against a high claim on any one individual. This is protection against abnormal severity of a single claim rather than abnormal frequency of claims in total. Specific stop-loss is also known as individual stop-loss.
Provides a ceiling on the dollar amount of eligible expenses that an employer would pay, in total, during a contract period. The carrier reimburses the employer after the end of the contract period for aggregate claims.
A number of variations are available for each of these two products.
Generally, all but the largest employers will want to protect their plan with both specific and aggregate stop-loss coverage. Occasionally, circumstances may be such that specific stop-loss by itself will fulfill the employer’s need for protection.
Percentage of U.S. workers covered by self-funded health insurance plans in 2021, by firm size
Specific and aggregate contracts are generally written in one of two ways—paid or incurred—depending on the needs of the employers. Paid contracts include contracts with coverage for claims incurred prior to the policy period, while incurred contracts include coverage for claims incurred during the policy period yet paid after the policy period. Nearly 86% of employers indicated that they had some form of paid coverage, with 55% indicating that they have a coverage period longer than 24/12 and 27% with 24/12 coverage.
Percentage of U.S. workers covered by self-funded health insurance plans in 2021, by industry
Many third party administrators (TPAs) offer stop-loss coverage themselves or through a related company, which can provide efficiencies and ease for employers and even bundled premium savings. Fifty-three percent of responding employers purchased this coverage directly from the TPA or their related reinsurance company. The remaining 41% of employers placed coverage with outside stop-loss carriers, with the top carriers being Tokio Marine HCC, SunLife and Optum.*
*2018 Marsh & McLennan Agencies Stop-Loss Survey
Percentage of U.S. workers covered by self-funded health insurance plans in 2021, by deductible amount
Insures the employer against a catastrophic loss incurred by one individual over a certain dollar limit (specific deductible) for a specified period of time.
Insures the employer against unusually high overall claim levels for the entire covered group for a specific period of time. Only claims below the specific stop-loss deductible on covered individuals are eligible.
A separate deductible requiring fulfillment before any specific stop-loss coverage is applicable.
An individual or individuals that are carved out specific risks from stop-loss coverage, or assigned a higher specific stop-loss deductible on that risk.
A self-funded mechanism in which an employer pays a fixed monthly premium which covers the cost of administration, the stop-loss excess reinsurance premiums and aggregate claims funding. At the close of the policy period, a settlement is performed with excess funding returned to the employer or in the case of inadequate funding, the employer will reimburse the carrier the difference.