What is Discounted Stop-Loss Cover
Discounted stop-loss cover is a reinsurance agreement used by self-insured companies to cover losses over a predetermined retention level. Discounted stop-loss covers are purchased at a reduced rate by self-insured companies who use the same vendor for other administrative functions.
BREAKING DOWN Discounted Stop-Loss Cover
When considering discounted stop-loss covers, self-insured companies have to consider whether the financial benefits and convenience of working with a single provider outweighs paying a higher rate for stop-loss coverage and working with several different companies that may be more specialized in providing administrative services. If a self-insured company’s risk profile is low, it may not make sense to purchase stop loss coverage.
Large companies have the option of self-insuring against certain risks, which keeps them from having to purchase an insurance policy. For example, a company that wants to provide health coverage to its employees but does not want to pay an insurer will establish a fund that it uses for medical expenses. While this approach keeps the company from paying insurance premiums it also carries with it the risk that the company will run out of money if a large number of employees suddenly become sick. The company can protect itself from unexpected increases in the severity or frequency of claims with stop-loss reinsurance.
While a self-insured companies sets aside its own money for claims, it is likely to use a third party to provide administrative services. For example, a third party may administer claims that are then paid by a company’s self-insurance fund. If the self-insured company uses a single third party for administrative as well as stop-loss reinsurance, it is often able to obtain a discount. This is because the third party is able to combine the costs of administering claims with the costs of administering the stop-loss policy. This discount is similar to the multi-line discount offered by insurers to individuals and businesses that purchase several policies from the same insurer.
Stop-loss represents a disproportionate amount of the fixed costs for an employer. The smaller the employer, the less risk they want to take on and the more stop-loss they’ll need to buy – at even greater expense. For smaller employers, the reinsurance purchasing decision becomes more relative and important. For example, a self-funded employer with a 500-life health policy might purchase specific stop-loss, paying $200,000 in claims for every member before the insurance kicks in. However, if a 20-life employer purchases $10,000 specific stop-loss, the stop-loss cost will be higher.
Negotiating Discounted Stop-Loss Cover
In the eyes of the reinsurance carriers, there is no perfect model of self-funding components. This opens the door for the employer and broker to play a vital role in controlling the premium and overall stop-loss cost. If you can sell the reinsurance carrier on your vendor alignment — your TPA, network and PBM — you can decrease the premium.