Stop-loss insurance

Stop-loss insurance is one of the most important pieces of the self-funding puzzle because it directly addresses the risk that keeps many HR leaders up at night: unpredictable, high-cost medical claims. In a self-funded health plan, your organization pays claims as they occur, which creates opportunities for savings and flexibility, but also introduces volatility that fully insured plans are designed to absorb.

That volatility is real. A small number of high-cost claims can account for a disproportionate share of total health care spending in any given year, and even one catastrophic claim can significantly impact an employer’s budget. Stop-loss insurance exists to put guardrails around that risk. It caps your financial exposure, protects your organization from worst-case scenarios, and makes self-funding a viable option for employers who want more control without taking on unlimited liability.

For HR leaders exploring self-funding, understanding how stop-loss insurance works is essential. It’s what allows you to balance innovation with stability, align benefits strategy with financial realities, and confidently evaluate whether self-funding is the right move for your organization.

Why risk management matters in self-funding

With a fully insured health plan, your carrier assumes responsibility for paying medical claims in exchange for a fixed premium. While this model limits financial risk, it also limits transparency, flexibility, and control.

Moving to self-funding shifts that responsibility to you. Instead of paying a fixed premium to an insurance carrier, your organization pays claims as they come from your own funds. This can lead to cost savings and more customization, but it also introduces more volatility and exposure to high claims.

Stop-loss insurance exists to address this challenge. It keeps self-funded plans viable and financially stable by providing a safety net for high claims so you don’t bear unlimited risk.

What is stop-loss insurance?

At its core, stop-loss insurance is a financial backstop for self-funded health plans. It reimburses you when claims exceed certain predetermined thresholds, helping protect your budget from unexpectedly high costs.

It’s important to understand what stop-loss is and what it isn’t:

• It’s not health insurance for your employees. Employees still receive benefits through your self-funded plan. Stop-loss only protects you, the employer, from catastrophic or unusually large claims.
• It limits financial exposure. By setting clear liability thresholds, stop-loss helps make self-funding predictable and strategically manageable.

How does stop-loss insurance work?

Stop-loss coverage is defined by attachment points, which are the thresholds at which the stop-loss carrier begins reimbursing your plan.

There are two main types of stop-loss coverage:

Specific (Individual) Stop-Loss

Specific stop-loss protects your plan against extremely high claims for one member. Once an individual’s eligible medical costs exceed a set amount, the stop-loss policy reimburses you for the excess.

Example: If your specific attachment point is $50,000 and an employee’s total annual claims reach $200,000, your plan pays the first $50,000 and the stop-loss carrier reimburses the remaining $150,000.

This type of coverage is especially valuable when you have a small number of high-risk individuals or when very large individual claims could threaten your budget.

Aggregate Stop-Loss

Aggregate stop-loss protects you from the total financial impact of all claims in a plan year. If your overall claims exceed a predetermined level, often a percentage of your expected annual claim costs, the carrier reimburses amounts over that threshold.

For example, if expected claims for the year are $1 million and your aggregate attachment point is $1.25 million, the insurer covers claim costs above $1.25 million.

This coverage is useful when multiple moderately high claims, rather than one catastrophic one, could result in unexpectedly high total expenses.

Why stop-loss matters for HR and finance

Stop-loss insurance plays a strategic role in helping HR leaders and finance partners align benefits design with budget goals.

1. It limits financial risk. Stop-loss creates a cap on how much you could be liable for, helping protect your organization’s cash flow.
2. It creates predictability. Rather than worrying about a single high-cost claim driving financial strain, you can forecast costs more accurately and plan for long-term benefits budgeting.
3. It supports the self-funding value proposition. Part of the appeal of self-funding is the ability to manage costs more closely and customize plans. Stop-loss ensures you can keep those benefits without taking unlimited financial exposure.

How to think about stop-loss insurance

Selecting stop-loss coverage isn’t just about choosing low premiums. You also need to align attachment points and coverage types with your risk tolerance, employee demographics, and financial capacity.

Here are a few HR planning considerations:

• Risk appetite: Are you more concerned about isolated catastrophic claims or a high volume of claims? That can help determine the right mix of specific vs. aggregate coverage.
• Group size and demographics: Smaller groups may see more volatility in claims, which can influence attachment points and premium costs.
• Budget predictability: Discuss with your finance team how different attachment points affect your projected spending and risk exposure.

Working with benefits brokers on stop-loss decisions

Many employers work with benefits advisors, brokers, or third-party administrators (TPAs) when evaluating stop-loss.

These partners can help:

• Structure coverage based on actuarial insights
• Evaluate carrier financial strength and contract terms
• Model scenarios based on your workforce’s health profile

Having expert guidance helps ensure you’re not just buying stop-loss coverage but strategically integrating risk protection into your benefits design.

Putting it all together

Stop-loss insurance is a foundational component of self-funded health plans. It gives HR leaders the confidence to explore self-funding without exposing your organization to catastrophic financial risk.

By understanding what stop-loss is, how it works, and how to choose coverage that matches your risk profile, you can help your organization unlock the flexibility, customization, and cost management benefits that self-funded plans offer.