Stop-loss insurance explained

Over the past several years, very large medical claims have become much more common. Costs associated with cancer treatment, premature births, and specialty drugs now regularly reach into the millions. Claims over $2 million are no longer rare. In fact, their frequency has increased more than 14x for midsize businesses in just three years.

When a midsize employer chooses to self-fund, they only pay for the healthcare used rather than paying a fixed premium to an insurance company. In years when claims are lower than expected, this approach can reduce overall healthcare costs. However, in years when claims are higher than expected, this can introduce balance sheet risk for CFOs and finance leaders. A single catastrophic claim can materially impact an employer’s healthcare budget. 

Stop-loss insurance exists to manage this risk. This article explains what stop-loss insurance is, how it works, where traditional stop-loss insurance can fall short, and how different structures address large-claim volatility. 

Key takeaways

• • • • Specific and aggregate are two types of stop-loss insurance. Specific stop-loss caps the cost of any one high-cost individual, while aggregate stop-loss caps the total claims for the entire plan year.

• • • • Even with traditional stop-loss insurance, employers can face real volatility from lasers and sharp renewal increases following high-claims years.

• • • • Stop-loss structure and contract terms matter, including renewal mechanics and laser provisions. 

What is stop-loss insurance? 

Stop-loss insurance protects employers from large or unexpected medical claims when they self-fund their health plans. 

Why do self-funded employers need stop-loss insurance?  

When an employer self-funds, they pay only for the healthcare employees and their dependents actually use. This can lead to savings when claims are lower than expected, but it introduces volatility when claims are high.

Stop-loss insurance limits risk by setting a maximum dollar amount the employer is responsible for paying. If a claim, or total claims, exceeds a set dollar amount called the attachment point, the stop-loss insurance company reimburses the excess. This protection allows employers to manage financial exposure, stabilize costs, and self-fund without being exposed to catastrophic losses.  

What are the types of stop-loss insurance coverage? 

1. 1. Specific stop-loss coverage

Specific stop-loss coverage protects self-funded employers from unexpected large claims from a single individual.  

Specific stop-loss kicks in when an individual on the health plan has unusually high healthcare expenses. It reimburses the employer for any amount over a set deductible.

Purpose: Caps how much an employer pays for any single, very expensive claim

For example: A self-funded employer with a stop-loss policy that includes a $150,000 specific deductible.

• • • • • • • An employee’s child needs neonatal intensive care, resulting in $900,000 in medical claims. 

• • • • • • • The employer would pay up to their $150,000 specific deductible. 

• • • • • • • The specific stop-loss carrier reimburses $750,000. 

1. 2. Aggregate stop-loss coverage

Aggregate stop-loss coverage is a policy that caps an employer’s maximum liability for a health plan’s total annual claims. 

Aggregate stop-loss coverage protects the employer when the overall claims for all plan participants combined end up much higher than expected. The employer’s total claims exposure is limited to a cap, called the attachment point. Typically, the attachment point is 125% of expected claims.

Purpose: Caps how much an employer pays for total claims in a year

For example: A self-funded employer expects $2,000,000 in total claims. The aggregate attachment point is calculated at 125% of expected, which is $2,500,000. 

• • • • • • • Expected annual claims: $2,000,000. 

• • • • • • • Aggregate attachment point (125%): $2,500,000. 

• • • • • • • The employer’s actual claims across all plan participants is $2,600,000.

• • • • • • • The aggregate stop-loss carrier reimburses $100,000. 

What is an attachment point?  

An attachment point is the dollar threshold where stop-loss insurance begins to pay. Once claims exceed the attachment point, the stop-loss carrier covers the excess.

What are the downsides of traditional stop-loss insurance?  

Despite its importance, traditional stop-loss insurance has notable limitations. Traditional stop-loss contracts can introduce volatility, particularly for midsize employers following a high-claims year. 

Two common sources of volatility include: 

• • • • A laser is when a stop-loss carrier increases the deductible or limits coverage on a specific high-risk individual, shifting more risk back to the employer. For example, an employer may have a $50,000 specific deductible for most employees, but a known high-cost individual is “lasered” at $200,000, meaning the employer pays the first $200,000 of that person’s claims before stop-loss coverage applies.

• • • • Uncapped stop-loss renewal increases mean premiums can jump dramatically after a bad claims year, with no limit on how high rates can go. Without a rate cap, stop-loss premiums can increase sharply at renewal, reintroducing volatility when protection is needed most.

These risks are common across the market, a concern highlighted by the Self-Insurance Institute of America (SIIA) in its overview of stop-loss market practices.  

Because these challenges stem from how stop-loss is priced and renewed for employers, some organizations look for stop-loss arrangements that place clearer limits on renewal volatility and claim exposure.

How does the ParetoHealth Risk Shield protect employers?

ParetoHealth unites employers with 50-1,000 employees into one strong, like-minded community that unlocks a better way to reduce volatility and lower overall health benefits costs. 

The ParetoHealth Risk Shield protects employers from the volatility of mid-sized and large, unexpected claims for more predictable year-over-year costs. 

Specifically, the ParetoHealth Risk Shield includes three layers of risk protection:  

A stop-loss insurance layer (for large, unexpected claims)
ParetoHealth offers access to the strongest stop-loss contract in the market including:  

• • • • • • Stop-loss rate caps, a limit on how much an employer’s stop-loss premium can increase at renewal, even in the event of high or catastrophic claims.  

• • • • • • A guaranteed no new laser policy for the lifetime of an employer’s ParetoHealth membership. 

A captive layer (for mid-sized claims)
ParetoHealth captive insurance is a group self-insurance arrangement owned by its Members. Employers contribute to a shared captive risk pool that covers mid-sized claims. Pooling risk means that one Member’s high claims are offset by others with lower claims, reducing year-to-year cost volatility for all Members.  

Additionally, because the captive is Member-owned, profits (if any) from the risk pool are returned to ParetoHealth members, creating added value beyond typical insurance. 

This structure ensures that even after a catastrophic claim, an employer’s costs remain predictable and protected. By eliminating volatility and making year-over-year self-funding healthcare costs more stable, the ParetoHealth Risk Shield allows employers to focus on long-term cost containment. 

An employer layer (for small, routine claims)
Employers self-fund their health plan, paying routine medical and pharmacy claims directly rather than fixed premiums to an insurance company. A third-party administrator (TPA) processes medical claims, and a pharmacy benefit manager (PBM) manages prescription drug programs and rebates.

Comparing traditional stop-loss insurance vs. ParetoHealth 

Stop-loss coverage varies widely by insurer, underwriting approach, and contract terms. Some arrangements prioritize lower initial pricing, while others emphasize renewal stability through tighter underwriting and contractual protections.  

Evaluating stop-loss requires looking beyond the deductible to understand renewal mechanics, laser policies, and how risk is distributed over time.
 

	Traditional Stop-Loss	ParetoHealth
Stop-loss renewals	Unpredictable: At renewal, stop-loss premiums can spike dramatically after a higher than expected claims year. There is usually no contractual limit.	Predictable: Industry’s strongest stop-loss rate caps limit year-over-year stop-loss premium increases.
Lasers	Lasers increase liability: High-cost claimants often trigger lasers exposing employers to more risk.	Guaranteed no new lasers: No new lasers for duration of membership.
Scale & Risk Distribution	No scale: In traditional stop loss, there is a direct 1:1 contract between the employer and carrier with no risk pooling, so a single catastrophic claim can materially impact the plan’s performance and renewal.	Scale of 1M+ covered lives: ParetoHealth’s scale delivers risk protection and negotiation leverage that employers can’t get on their own.

 

How midsize employers benefit from ParetoHealth’s scale to absorb healthcare cost volatility 

The value of ParetoHealth extends beyond protection from large, unexpected claims. When employers leave the reactive annual cycle of managing high, unpredictable traditional health insurance renewals, they can finally focus on building a long-term healthcare cost-containment strategy.

By joining the ParetoHealth community, midsize employers gain a multiyear benefits strategy that delivers predictable spending, proven savings, and turnkey implementation.

Watch this short video to learn more about the difference between traditional stop-loss and ParetoHealth protection.