Executive Summary: Stop Loss Insurance: The Mechanism That Makes Small Group Self-Funding Viable
LFP-02.01 — The Risk Layer#
Stop loss is not health insurance. It is an indemnity policy purchased by the employer, as plan sponsor of a self-funded health plan, to cap the plan’s financial exposure when claims exceed defined thresholds. The carrier’s contract runs to the employer, not to covered members. The carrier evaluates whether plan claims meet policy terms; reimbursement flows into the employer’s claims fund, not to providers or members. This structural separation places stop loss outside the consumer protection requirements governing fully insured products under the ACA. Stop loss carriers can decline groups, apply exclusions for specific members, and set individual attachment points based on health status – practices unlawful on a fully insured product. Stop loss is also not reinsurance in the technical sense: reinsurance is a contract between two insurance companies, while stop loss is a contract between a carrier and an employer plan sponsor.
The policy contains two protection categories. Specific stop loss defines a per-member threshold above which the carrier reimburses the plan for that member’s excess claims. For groups of 10 to 50 lives, common attachment points range from $25,000 to $75,000. The 2025 Aegis Risk survey reported average premiums of $229.40 PEPM at a $100,000 attachment point declining to $50.98 PEPM at $500,000. Aggregate stop loss defines a total group claims threshold, typically 120% to 125% of expected claims using monthly demographic factors. When total group claims exceed the aggregate attachment point, the carrier reimburses the excess up to the aggregate maximum.
Several contract provisions shape actual risk exposure beyond the headline numbers. Terminal liability governs claims incurred during the policy period but paid afterward; some policies include run-out automatically, others require tail coverage at additional cost. The aggregating-specific provision determines whether specific stop loss claims count toward the aggregate calculation, a binary contract term with significant financial consequences. No-new-laser provisions govern whether the carrier can impose member-specific attachment point increases mid-policy.
Reimbursement is not automatic. For specific claims, the TPA prepares and submits documentation packages to the carrier, which reviews and pays over timelines commonly running 30 to 90 days. The employer’s claims fund pays in real time while reimbursement arrives weeks or months later. A 20-person employer advancing $75,000 in unreimbursed claims above the attachment point faces meaningful short-term exposure. Some TPAs bridge this gap by advancing stop loss recoveries, a service that depends on TPA financial capacity rather than any contractual guarantee. Aggregate reimbursement is calculated after the policy period and run-out close, arriving during reconciliation often 12 to 18 months after the plan year began.
The U.S. employer stop loss market generated approximately $35.5 billion in annual premium in 2023, covering 61 million lives, at a compound annual growth rate of 11.9% from 2018 to 2023. The market divides between independent carriers selling into the TPA distribution channel and carrier-affiliated products bundled within proprietary level funded offerings. Nationwide’s $1.25 billion acquisition of Allstate’s employer stop loss segment, completed July 2025, and Prudential Financial’s September 2024 product launch expanded the independent field. Market conditions are cyclical: loss ratios deteriorated from 79.5% in 2018 to 80.3% in 2023, driving single-year premium increases of 8.8% to 10.5%. Claims exceeding $1 million increased more than 34% over a recent three-year period; claims exceeding $5 million increased 275%.
An employer who has not reviewed terminal liability provisions, does not understand their aggregate corridor, and does not know whether specific claims aggregate into the aggregate calculation has a policy that may not provide the protection they believe they purchased. The stop loss policy is a financial instrument whose terms require the same scrutiny a lender applies to a credit facility.