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.

Related or Semi-related Video

Finance: What are Limit Order, Sell Limi...7 Views

00:00

Finance a la shmoop what is a limit order? you want to sell a thousand shares

00:07

of Colonel electric it was demoted after they cut their dividend the shares have [Scissors cuts dividend in half]

00:13

been trading wildly between $15 and $25 a share you don't want to feel like a

00:19

moron for having sold them at fifteen bucks when six weeks later they kissed

00:24

25 with tongue so what do you do well you put in a limit order that is you put

00:30

a limit of a minimum price of 25 bucks a share for Colonel Electric such that [Pile of stocks appear]

00:36

those shares will simply sit in your account unsold maybe forever until

00:41

somebody out in the wild blue yonder of Stockland is willing to pay twenty five [Woman standing at a colonel electric stand]

00:47

dollars or more for the shares where you have a minimum price limit of 25 bucks a

00:52

share in your order so here's to hoping they sell and don't get further demoted [Man carries stock into car]

00:57

Sargent Electric is just a place you don't want to go

Find other enlightening terms in Shmoop Finance Genius Bar(f)