What is the primary purpose of a stop-loss policy?

What is the primary purpose of a stop-loss policy?

• A. To cover excess losses beyond a set limit
• B. To insure speculative risks
• C. To facilitate risk transfer
• D. To underwrite group captives

Answer: (A)

The primary purpose of a stop-loss policy is to cover excess losses beyond a set limit. This type of insurance is often used by businesses and organizations, particularly in health insurance and self-funded plans, to limit the financial exposure associated with claims. Essentially, the stop-loss policy acts as a safety net—it provides protection against excessive claim amounts that could jeopardize the financial stability of an organization. It allows them to plan and budget more effectively by capping their potential losses. By covering only losses that exceed a predetermined threshold, stop-loss insurance helps organizations manage their risk and ensures that they are not overwhelmed by unforeseen high costs. This makes it an essential tool for entities looking to retain part of their risk while also protecting themselves from catastrophic losses. Thus, the focus of stop-loss policies is on preventing the financial impact of large, unexpected claims, which is why this option correctly identifies their primary purpose.

The primary purpose of a stop-loss policy is to cover excess losses beyond a set limit. This type of insurance is often used by businesses and organizations, particularly in health insurance and self-funded plans, to limit the financial exposure associated with claims. Essentially, the stop-loss policy acts as a safety net—it provides protection against excessive claim amounts that could jeopardize the financial stability of an organization. It allows them to plan and budget more effectively by capping their potential losses.

By covering only losses that exceed a predetermined threshold, stop-loss insurance helps organizations manage their risk and ensures that they are not overwhelmed by unforeseen high costs. This makes it an essential tool for entities looking to retain part of their risk while also protecting themselves from catastrophic losses. Thus, the focus of stop-loss policies is on preventing the financial impact of large, unexpected claims, which is why this option correctly identifies their primary purpose.