Reinsurance (Stop-Loss Insurance)

What Is Reinsurance

Reinsurance, also known as ‘stop-loss’ insurance within the healthcare industry, is when health insurance companies purchase their own insurance policies from other reinsurers to help limit their risk management loss in case of any major financial loss. 

Assigning financial risk to another insurer is called ‘ceding.’ In medical coverage catastrophes, an insurance company works with reinsurers to protect their customers with the right coverage that would ordinarily create a financial challenge. Like traditional health insurance models, premiums are paid, but they are shared with reinsurance companies.

How Reinsurance Works

Reinsurance works much in the same way as a traditional health insurance policy would for consumers. First, a health insurance company enrolls a member, and that member, or policyholder, will now be eligible for benefits. The perk of health insurance is that a policyholder will only be responsible for a certain amount of money out of their own pocket, referred to as an out-of-pocket maximum. This means, if the member racks up a huge bill, they will only pay a fraction of the cost, leaving the health insurance company to pick up the remaining tab. In order for a health insurance company to minimize their losses, they have a reinsurance policy with another health insurance provider, who will now split the cost of the remaining policyholder's medical bill.

An Example Of Reinsurance

A patient has $140,000 worth of medical expenses and their health plan has a $5,000 limit on the patient’s out-of-pocket costs. Under a stop-loss insurance program, the patient’s insurance company must cover $40,000 of the first $50,000. This is a 10% cost-sharing plan which means that the insurance company pays $5,000 and the reinsurer pays $40,000 of any expenses over a $100,000 limit. Expenses beyond that $100,000 cap within the policy are to be incurred by the initial insurer. 

Who Are Stop-Loss Reinsurers

Stop-loss insurance is an international business to help cover risk management events and to provide expansive capital enterprises to cover losses. Health stop-loss insurance is not just promulgated by other major insurance carriers, stop-loss can be purchased from other sources:

  • Large US corporations, such as banks.
  • Primary US insurance carriers.
  • Global insurance companies. 

Benefits Of Reinsurance

Reinsurance companies help to lessen the amount of expense that is imposed on insurance carriers. It also gives businesses, especially small companies, and individuals better affordability options. Additional benefits offered by stop-loss insurance companies can include the following:

  • Lower premiums
  • Coverage for people with disabilities and chronic conditions
  • Disabled individuals can get coverage from smaller insurance groups or they can get private coverage
  • Increased industry competition
  • Small carriers can expand and increase their services to individuals

Types of Stop-Loss Policies

There are typical insurance policies which include:

  1. Proportional - This stop-loss insurance entity agrees to share in a calculated percentage of the losses incurred by the insurer.
  2. Non-proportional - The insurer pays only if the risk management losses incurred by the insured exceeds a certain amount. For example, an insurance company can purchase a reinsurance policy that pays losses that have exceeded $500,000. Yes, the insured can get coverage costs beyond that amount if needed, but they must be responsible for the original $500,000 cost.
  3. Excess of Loss - This insurance is available in a couple of different categories. They include Per Risk and Catastrophe.

Medical stop-loss coverage typically involves either a specific or aggregate loss: a. specific: sizable medical costs associated with only one policy owner. b. aggregate: major losses from different policyholders with a set amount during their annual contract which stop-loss insurers will reimburse. The types of medical events that affect expensive insurance costs include:

  • Severe traumatic conditions
  • Neonatal or congenital conditions, as well as their long-term specialty prescriptions
  • Specialty care for chronic or genetic conditions

Like the rest of us, insurance companies also buy insurance to protect themselves from unforeseen medical coverage events. Stop-loss insurance helps an insurer remain solvent especially when they are faced with unexpected risk management coverage events, high-cost medical treatments, and expansive financial emergencies. It helps an employer from being slammed with an expensive single employee medical bill that negatively impacts its health plan and even its capital inventory.