Stop-Loss Insurance

When an employer chooses to self-insure (self-fund) its employee health plan, it pays workers' medical claims directly out of its own funds instead of buying a fully insured policy from a carrier. That approach saves premium and gives the employer control over plan design, but it exposes the business to an open-ended risk: one premature infant, transplant, or cancer case can generate seven figures of claims. Stop-loss insurance is the reinsurance-style backstop that caps that exposure, reimbursing the employer once claims climb past a defined attachment point.

There are two flavors, and most self-funded plans buy both. Specific (individual) stop-loss reimburses claims on any single covered person above a per-member deductible — for example, everything over $75,000 on one employee in a plan year. Aggregate stop-loss protects the plan as a whole, kicking in when the plan's total claims exceed roughly 120–125% of expected claims for all members combined. Together they convert an unpredictable liability into a budgetable one: the employer knows its worst-case cost equals the two attachment points plus the stop-loss premium. This is functionally the small-employer analog to reinsurance, and it is what makes self-funding viable for companies with as few as 25–50 employees under a level-funded arrangement.

A practical nuance buyers must watch is the contract basis. A "12/12" contract covers only claims incurred and paid within the plan year, while "12/15" or "paid" contracts extend the window to catch run-out claims — a real gap if the plan terminates or switches carriers. Buyers should also confirm there is no aggregating specific deductible or laser (a higher deductible the carrier applies to a known high-cost individual) that quietly shifts risk back onto the employer. Stop-loss keeps a self-funded plan's downside bounded much like a self-insured retention caps exposure in a casualty program.