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Stop Loss 101–The Benefit of Reinsurance


Stop loss insurance, sometimes called reinsurance, is a product designed to protect employers and self-funded health plans from catastrophic losses.  There are two types of coverage:

Specific, with employer protection against a specific large patient expenditure, and 

Aggregate, with employer protection against excessive claim expenditures for the entire group.

Specific Stop Loss


Specific stop loss provides catastrophic protection to the self-funded plan.  Medical benefits only may be covered or prescription drug claims can additionally be covered.  The client chooses the Specific stop loss deductible.  The stop loss deductible is the amount for which the client is responsible for each individual employee or dependent claim in the policy year.

Typically, the larger the group and the health plan budget, the more risk is taken by the plan.  For example, a group of 500 employees may select a Specific deductible ranging from $75,000 to $125,000 per claim, or higher or lower.  A group of 300 employees may decide on a Specific deductible of $50,000 per claim.

A reimbursement maximum is stated in the Specific contract.  The most common maximum is $1,000,000.  Higher limits are available.  The Specific stop loss premium is paid monthly.

Aggregate Stop Loss


Aggregate stop loss provides protection for an excessive amount of claim expenditures for the entire group for the policy year.  The Aggregate premium is paid annually in advance.

Coverage is based on a floating Aggregate attachment point.  To calculate the annual Aggregate attachment point, the monthly enrollment is multiplied by a pre-established aggregate retention factor and aggregated for each of the (12) months in the policy year.  The policy retention factors are influenced by the claim and/or premium experience of the group, expected medical costs in that geographic area, the contract terms, and a medical trend component.  The Aggregate factor is usually established at 125 percent of expected claims.

The premium for Aggregate coverage is low; the retention factors are calculated conservatively.

The maximum amount applied to the Aggregate contract per individual are the claims under the deductible (not reimbursed under the Specific stop loss contract).  Any amount in excess of the Specific stop loss deductible is reimbursable only under the Specific contract.

The client determines the benefits they wish to have covered under the Aggregate contract.  Covered benefits usually include medical and prescription drug;  dental, vision and weekly disability can also be included.

Stop Loss Contracts


Stop loss contracts are generally underwritten for a 12-month period.  Incurred and paid date criteria are conditions of the policy. Claims have to meet both the incurred and paid criteria in order to be covered.

There are several types of contracts:

Incurred / Paid Basis


1.  12/12 - Incurred in 12 month contract period / paid in 12 month contract period

Example:

Policy Period: 1/1/07 - 12/31/07
Incurred Dates: 1/1/07 to 12/31/07
Paid Dates: 1/1/07 to 12/31/07

2.  12/15 - Incurred in 12 month contract period / paid in 15 month contract period

Example:

Policy Period: 1/1/07 to 12/31/07
Incurred Dates: 1/1/07 to 12/31/07 
Paid Dates: 1/1/07 to 3/31/08
*This is a run-out policy

Paid Basis


1.  15/12 - Incurred in 15 month period / paid in 12 month contract period

Example:

Policy Period: 1/1/07 - 12/31/07
Incurred Dates: 10/1/06 to 12/31/07
Paid Dates: 1/1/07 to 12/31/07
*This is a run-in policy

* Other forms of run-in and run-out coverage are available.

For more information about self-funding, please contact us at 1.800.242.6226, or email us at sales@meritain.com.

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