Aggregate Stop-Loss Insurance

Not all companies use outside insurance. If a company is big enough, it can opt for self-insurance. Basically, this means that the firm sets aside money to use in emergency situations.

The decision to self-insure can result in some cost savings compared to using an outside insurance agency. However, it can lead to some additional risk as well, and stop-loss insurance represents a way of limiting the dangers.

A company that decides to go the self-insurance route might still buy what's called stop-loss insurance. Basically, this protects the company against damages beyond what it has set aside in its self-insurance plan. The firm has self-insured for most of the issues and surprises that come up in a typical year. But if something massive happens, or if an off-the-charts number of smaller claims come up, the stop-loss insurance steps in to make sure that the damages don't get out of hand.

An aggregate stop-loss plan works by setting a total amount above which the insurance company steps in. The policy creates a financial threshold. Once losses reach that amount, the outside insurance agency starts to cover the damages.

There is another type of stop-loss policy that covers catastrophic claims. Rather than setting a total amount, like the aggregate policy does, the catastrophic policy works on an individual basis. If any single claim is too much for the self-insured company, the catastrophic policy gets activated.