Whose fault is this problem?

The purpose of this site is to not place blame, but rather to point out the problem and then offer one or more solutions.

It is worth noting, however, that when asked many stop-loss carrier executives have placed the blame on the consulting community for not letting the buyers know of the risks they are taking on—even though the carriers in almost all cases make no effort to put in writing that risk themselves.

Lasers help keep costs down. Isn’t that a good thing?

Plan Sponsors have the option at renewal to offer to accept a laser to reduce premiums. The issue here is not lasers negotiated at the behest the Plan Sponsor. In comparison, if the stop-loss carrier is given the unilateral right to impose lasers, that gives the carrier the right to act in a way that benefits it but could be financially devastating for the Plan Sponsor. As a general statement, presume that a stop-loss carrier that imposes a $100,000 laser (which might be deemed affordable) will also issue a $5,000,000 laser if the medical claims are high enough.

Our stop-loss plan has a No New Laser and Rate Cap option. Isn’t that sufficient?
While that is a good start, it is not sufficient in almost all cases because the carriers do not guarantee to renew that option if claims turn bad (we have seen that happen). Thus the client with a large ongoing claim that starts in Year One with that provision is protected for the renewal in Year Two, but it is almost never protected for Year Three in that example. That is why a Gilbraltar plan is needed. Some conditions like hemophilia can last for many years at a continually high level.
Aren’t all stop-loss policies pooled already?
All insurance is pooled for premiums initially, but the real question is whether the stop-loss carrier pools its renewals or instead applies large ongoing claims solely to the client. If pooled, a $2 million ongoing claim could be absorbed and the client would not be financially punished; however, if the policy is not pooled, much or all of the $2 million claim would be lasered and push back on the client to pay.
Why isn’t this problem more widely publicized if it is such an important issue? My broker has never said anything about this.
There is no easy answer for this. The stop-loss industry is silent in writing on how it underwrites the renewals of stop-loss plans if there is a large ongoing claim. The contracts are virtually all looked at one year at a time (i.e., on a short-term basis) as opposed to the necessary long-term view. Ultimately the issue has been virtually ignored on all sides—a groupthink that is only now starting to give way to a more realistic look at the stop-loss world. The goal of this site is to educate the industry on this issue, explain the risks, and offer solutions.
Isn’t it true that most self-funded health plans do not pay up to the full laser amount?
It is true that not all plans end up paying the full amount of the laser (so the cost to the Plan Sponsor is less than was feared), but while that reduces the risk of a worst case scenario, it certainly does not eliminate it.
What is the purpose of the Gibraltar Index?
The Index is designed to provide prospective stop-loss buyers with a number (not unlike a FICO score) that attempts to rank the quality of a stop-loss contract on many fronts, especially the long-term protection.
How can stop-loss carriers afford to take on this additional level of long term risk?

Beyond the pooling of renewals mentioned elsewhere, there is another factor to consider. The Milliman 2019 stop-loss survey notes that stop-loss carriers sell about 4-8% of their quotes. This comes from a standard market where quotes are largely considered all the same other than cost. Once sold, only 33% of the carriers maintained an annual persistency of 85% or greater. The Gibraltar plan, if sold properly, should have a dramatically higher sales ratio as well as higher persistency. That can help with profitability as well.

Isn’t this more of a problem for smaller employers that don’t have sufficient financial reserves?

That is clearly true up to a point. A company with 2,000 employees, for example, will likely have larger financial reserves than a company with 200 employees. In addition, the stop-loss carrier for the 2,000 employee company—with that much more stop-loss premium—might be willing to absorb without a laser a large ongoing claim, whereas they would impose one on the smaller company. Having said that, a 2,000 employee company could still have a hyper-expensive claim that resulted in a large laser.

The question, however, leads to an important point. The renewal underwriting for a larger company can be more lenient and less risky than for a smaller company—presuming both are renewed based solely on their own claims experience. Imagine instead if the 200 employee company were renewed based largely on the claims experience of a pool of 50,000 or 100,000 of employees—where large ongoing claims can be absorbed by the larger pool.