What is stop-loss insurance?

Stop-loss insurance is reinsurance protecting self-funded employers from catastrophic health plan claims. Specific stop-loss covers individual claims above a per-person attachment point (typically $50,000-$250,000). Aggregate stop-loss covers total plan costs exceeding a percentage of expected claims (typically 120-125%). Both are ERISA-governed and purchased from a third-party stop-loss carrier.

Stop-loss insurance is a financial protection policy that limits an employer’s liability for health claims under a self-funded (self-insured) health plan. When an individual claim or the plan’s total claims for the year exceed a defined threshold, the stop-loss carrier reimburses the employer for costs above that threshold. Without it, a single catastrophic diagnosis or an unexpectedly high-claims year can expose a company to seven-figure losses.

Stop-loss insurance is not health insurance for employees. It is a reimbursement contract between the employer and a stop-loss carrier that sits on top of the self-funded plan. Employees never interact with it directly.

Self-funded vs. fully insured plans

To understand stop-loss insurance, it helps to know what makes a plan “self-funded.”

In a fully insured plan, the employer pays a fixed premium to an insurance carrier each month. The carrier assumes all claim risk. Predictable cost, but no upside if claims run low.

In a self-funded plan, the employer pays claims directly from company assets (or a dedicated trust). The employer keeps savings when claims are low but absorbs losses when claims spike. Stop-loss insurance caps those losses.

Two types of stop-loss coverage

Most self-funded employers buy both types. They address different risk exposures.

Specific (individual) stop-loss

Specific stop-loss covers a single member’s claims in a plan year. The employer sets a specific deductible, also called the attachment point, typically between $30,000 and $250,000 per covered person. If one employee’s cancer treatment costs $400,000 and the specific attachment point is $100,000, the stop-loss carrier reimburses the employer for the $300,000 above the threshold.

The specific deductible is the single biggest lever in stop-loss pricing. Lower deductible = lower employer risk but higher premium. Carriers model this against plan demographics, industry, and historical claims before quoting.

Aggregate stop-loss

Aggregate stop-loss caps the employer’s total claims liability for the entire covered population in a plan year. The aggregate attachment point is typically calculated as a percentage (usually 115 to 125 percent) of expected claims for the year, called the aggregate corridor.

If expected annual claims for 500 employees are $2.4 million and the aggregate factor is 120 percent, the aggregate attachment point is $2.88 million. If total plan claims reach $3.3 million, the stop-loss carrier covers the $420,000 above the attachment point.

Specific vs. aggregate comparison

How attachment points work

The attachment point is the dollar threshold the employer must absorb before the stop-loss carrier steps in. It is negotiated at policy inception and determines both premium cost and risk exposure.

Specific attachment point: A per-member, per-year deductible. If set at $80,000, the employer pays the first $80,000 of each individual’s eligible claims. Claims above $80,000 are reimbursed by the carrier.

Aggregate attachment point: Calculated using the aggregate factor applied to expected claims. The formula is: expected claims x aggregate factor = attachment point. The employer absorbs all claims up to this dollar amount.

Corridor: The gap between specific claims already reimbursed and the aggregate attachment point. Large specific claim payouts reduce the distance the employer must travel before aggregate coverage triggers.

Contract terms: run-in and run-out

Stop-loss policies are defined by two contract periods that govern which claims count toward the attachment point.

Run-in (incurred period): The date range during which a claim must be incurred (the medical service must occur) to qualify for coverage.

Run-out (paid period): The date range during which the claim must be paid or submitted for reimbursement.

A 12/12 contract covers claims incurred and paid within the same 12-month plan year. Tight coverage; late-arriving claims can fall outside the window.

A 12/15 contract covers claims incurred in the 12-month plan year but paid within 15 months, providing a 3-month run-out window. This reduces IBNR exposure significantly.

IBNR: incurred but not reported claims

IBNR (incurred but not reported) claims are medical services that occurred during the plan year but have not yet been submitted or paid by year end. IBNR is one of the primary financial risks in self-funded plans.

A large surgery in December may not generate a claim until February. Under a 12/12 contract, that claim may not count toward the current year’s attachment points. Employers must maintain adequate reserves (typically 10 to 15 percent of projected annual claims) to cover IBNR liability. Stop-loss carriers price contracts partially based on IBNR assumptions; a 12/15 or 12/18 run-out window transfers more IBNR risk to the carrier at a higher premium.

ERISA implications

Self-funded employer health plans are governed by ERISA (Employee Retirement Income Security Act of 1974) at the federal level. This has significant operational implications for HR and benefits teams:

• State insurance mandates do not apply. Self-funded plans are exempt from state-level benefit mandates (e.g., mandated infertility coverage, chiropractic minimums). This gives large employers design flexibility but requires intentional benefit architecture.
• Stop-loss insurance itself is not classified as health insurance under ERISA. It is a contract of indemnity between employer and carrier. Some states attempt to regulate it as insurance; federal courts have largely sustained ERISA preemption in self-funded contexts.
• Plan document requirements: ERISA requires a written plan document and summary plan description (SPD). Stop-loss terms must align with the plan document to avoid claim disputes.
• Fiduciary duty: HR and benefits leaders administering self-funded plans owe a fiduciary duty to plan participants. This includes prudent carrier selection, claims oversight, and accurate SPD disclosures.

When to buy stop-loss insurance

Stop-loss is appropriate whenever an employer moves from fully insured to self-funded, regardless of company size. The relevant questions are: how much risk can the employer absorb, and at what premium does stop-loss coverage become cost-effective?

Key triggers that typically prompt stop-loss purchases:

• Employer moves to self-funded plan for the first time
• Plan enrollment exceeds 100 covered lives (below this, specific deductibles tend to be high and premiums expensive relative to fully insured alternatives)
• Claims experience shows one or more catastrophic cases in prior years
• CFO or board sets a defined maximum annual health plan liability
• Employer is in an industry with higher-than-average claims risk (manufacturing, logistics, healthcare workers)

Cost factors

Stop-loss premiums are driven by several variables. HR finance leads should model each when benchmarking carriers:

Employer considerations checklist

HR, benefits, and finance teams evaluating stop-loss coverage should work through these questions before binding a policy:

• Cash reserves: Does the company have sufficient liquid reserves to fund claims up to the aggregate attachment point mid-year?
• Claims data access: Does the TPA (third-party administrator) provide real-time claims reporting so the team can monitor run rate against attachment points?
• Carrier financial strength: What is the stop-loss carrier’s AM Best rating? A-rated or above is standard practice.
• Lasering: Has the carrier excluded or “lasered” any specific high-risk employees from coverage? Understand what claims would not be reimbursed.
• Renewal terms: Are renewal premiums guaranteed for 12 or 24 months? One-year guarantees expose the plan to sharp increases after a high-claims year.
• Run-out coverage on termination: If the plan terminates or switches carriers, what happens to in-flight claims?

Stop-loss insurance vs. reinsurance

These terms are often confused. The key distinction:

Stop-loss insurance is purchased by a self-funded employer to cap its own health plan liability. The employer is the policyholder.

Reinsurance is purchased by an insurance carrier to cap its own underwriting risk on the policies it sells. The carrier is the policyholder. Employees and employers have no direct relationship with a reinsurer.

Some captive arrangements blur this line, but for most HR teams, stop-loss is the relevant instrument.

Frequently asked questions