Benefit breakdown: stop loss insurance

Welcome to ThreeFlow’s benefit breakdown series, where we dive into the details of a coverage and discuss the most recent trends with the help of ThreeFlow’s data and benefits experts.

For this edition, we spoke with Erica Rocque, one of our underwriting operations managers, about stop loss benefits. Erica has been working with stop loss products for over eight years and helped us break down trends and what they mean for brokers and carriers.

A quick refresh, what’s stop loss?

You can think of stop loss like safety insurance for unexpected payments. For example, employer groups who self-fund their medical plans often purchase stop-loss insurance to protect themselves against unforeseen and catastrophic medical and pharmacy claims.

What does ThreeFlow’s data show us about stop loss?

ThreeFlow’s data is unique because it shows us benchmark metrics (from an unbiased perspective) on benefits like stop loss. We’ve recently seen two prominent trends, the first being around lasers and the second, experience refunds.

Trend 1: ‘No new lasers’ and rate caps

First off, what’s a laser, and why do they matter?

Lasers are a way for carriers to shift the risk to the employer group. For example, a carrier may decide to laser a particular individual because they’ve assessed them to be riskier, often due to previous, current, or predicted health issues. In this case, the employer must accept more or all of the risk to insure that specific individual.

What does ThreeFlow data show us about lasers in contracts?

We see two trends relating to lasers: ‘no new laser’ contracts and rate caps.
Specifically, our data shows that two-thirds of the stop loss policies are ‘no new lasers’, while about half of them have a renewal rate cap.

What do ‘no new laser’ and rate caps mean?

When a carrier discovers or believes that a particular individual is going to incur very high claims over the projected contract period, they essentially have two options:

• Collect enough premium to cover those expected high claims, which could result in a rate increase.
• Or put a laser on that individual, in which case, claims would only be covered after a certain threshold (special risk deductible) or possibly not covered at all (full laser).  

However, employer groups can get protection if they obtain a ‘no new laser’ and rate cap guarantee. These provisions state that the carrier agrees not to include any new lasers in the next renewal. They also guarantee stop loss premiums won’t increase by more than a certain percentage (usually between 40-60%).  

What’s the significance of this trend for brokers and carriers?

By offering a ‘no new laser’ and rate cap, carriers are taking the risk that an extremely high claimant may come along, and they won’t be able to charge the appropriate amount of premium to cover that claim. Because of this added risk, carriers usually charge an additional upfront premium. However, at the same time, carriers are constantly pressured to keep rates low, so there’s a conflict.  

Their approach may often depend on the group’s risk tolerance and the carrier. ‘No new lasers’ and rate caps are almost always issued together. Without using them together, a ‘no new laser’ provision puts the group at risk for a significant premium increase, and a rate cap alone puts the group at risk for serious financial liability.  

It’s common for carriers to have an unspoken practice of not lasering at subsequent renewals. Similarly, carriers don’t like to request 50%+ rate increases—because frankly, it puts a bad taste in the mouth of their broker partners. But these non-contractual expectations are ‘nice to have’ semi-assurances for employer groups. Without the contractual agreement of a ‘no new laser’ or rate cap, anything goes.

As one of our stop loss experts, what’s your take on the data?

I’ve seen ‘no new laser’ and rate caps become more popular over the past ten years. Groups seek these provisions because they assure that the carrier isn’t simply trying to ‘buy the business.’ At the same time, it’s a way for the carrier to let the group know that they want to be a good partner for the long haul.

Trend 2: Experience Refunds

What are experience refunds?

Experience refunds allow employer groups to receive a portion of their stop loss premiums back if they meet a certain loss ratio threshold. Let’s say a group paid $100K in stop-loss premium over their contract year but only experienced large claims of $20K. If the group has an experience refund provision, they’ll receive a portion of their $80K back.  

What does ThreeFlow data show us about experience refunds?

We see 85% of stop loss policies don’t have an experience refund provision. When they do, the refund cap varies between 10% to 25% and is almost always calculated as a 50% surplus share.

What’s the significance of these trends for brokers and carriers?

Experience refunds may be more appropriate for some groups than others. This will depend on their claims experience history and how confident the group and carrier are on their claim projection.

Because of the risk that they may not keep all of the premium charged and the administrative work involved in reviewing and processing refunds, carriers may increase premiums for plans with experience refund provisions.

As a stop loss expert, what’s your take on the data?

I’m not surprised that only 15% of policies have an experience refund provision. Carriers do not commonly offer them, and when they’re offered they come with hefty stipulations. A refund is often only payable when groups run below a certain loss ratio. There may be a cap on the amount that is refundable, and the refundable amount may be shared between the group and the carrier. Additionally, some carriers will only issue a refund after the group has renewed their contract for the next year.

If carriers were to simplify the restrictions, these refunds might become more popular. But the idea of experience refunds really goes against the whole nature of insurance. The market is asking for experience refunds if they don’t use all of the premiums that they paid, but they’re not willing to pay more if they use more than  their premiums cover.

Key takeaways

Stop loss benefits are evolving for carriers and brokers, and the trend of 'no new laser', rate caps, and experience refunds is just on way that ThreeFlow's data shows these changes. If you have underwriting needs and want to learn more about using ThreeFlow's data as a part of your process, contact us today.