Beware of the Short Stop Loss Year

One of my self-funded clients recently looked to convert from a fiscal plan year to a calendar year. In order to bridge the two years, we needed to either purchase a 16-month paid stop loss contract that would run through the stub year and the following calendar year, or a 4-month contract that would then renew with a 12-month year to follow.

In these situations, my advice to the client is to take the two contracts instead of the elongated year – the fixed fee pricing on a long contract can get exceedingly high as the policy continues to reimburse large claims that have already pierced the deductible over a longer period. Shorter plan years, on the other hand, apply a deductible reset for the 4-month period and then an additional deductible reset for the next 12-month period. So the client typically sees a big reduction in fixed fees, but pays for it with taking on a bit more risk in seeing two deductible resets in successive periods.

To my great surprise, the carrier tried to sell us a 4-month policy that was +21% above the inforce rates, even though the full 12-month renewal would have been +24%. Essentially, the carrier was giving us no reduction for the fact they would be paying almost no claims over the 4-month period as the deductible reset. Another broker may have taken this “concession” and tried to pass it on to the client as good news. After all, it is a reduction from a true 12-month renewal.

Not only did I tell the carrier it was unacceptable, demonstrating to them how they will likely run at a <30% loss ratio over the 4-month period, but after negotiating the renewal to a pass I’ve still decided to go out to market because the carrier didn’t hit my -10% target. It’s simply not fair to the client even if I can “sell it.”

Everyone needs to make money and the insurers are stakeholders in each transaction just as the client is. But the numbers don’t lie and if the broker and carrier community don’t always support their clients in good faith, the business will find another vendor who will.

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