Which approach can cover catastrophic losses in a self‑insurance setup?

Which approach can cover catastrophic losses in a self‑insurance setup?

• A. Reinsurance
• B. Stop loss insurance (high deductible)
• C. Credit insurance
• D. Surety bonds

Answer: (B)

In self-insurance, you cover expected losses with funded reserves, but you still face the risk of a catastrophic, high-cost event that could overwhelm those reserves. Stop-loss insurance provides protection against exactly that scenario. It kicks in when claims exceed a predefined level, either for a single large claim (specific stop-loss) or for total claims in a period (aggregate stop-loss), effectively capping the organization’s out-of-pocket costs beyond the retention you’ve set. This lets a self-insured program absorb normal fluctuations while staying solvent during extreme claims. Other options aren’t aimed at this purpose. Reinsurance is a broader risk-transfer tool and can be used in self-insurance, but stop-loss is the standard method specifically designed to cover catastrophic losses within a self-funded plan. Credit insurance and surety bonds protect different risks (payables or contractual obligations) and don’t address catastrophic claim costs in a self-insurance context.

In self-insurance, you cover expected losses with funded reserves, but you still face the risk of a catastrophic, high-cost event that could overwhelm those reserves. Stop-loss insurance provides protection against exactly that scenario. It kicks in when claims exceed a predefined level, either for a single large claim (specific stop-loss) or for total claims in a period (aggregate stop-loss), effectively capping the organization’s out-of-pocket costs beyond the retention you’ve set. This lets a self-insured program absorb normal fluctuations while staying solvent during extreme claims.

Other options aren’t aimed at this purpose. Reinsurance is a broader risk-transfer tool and can be used in self-insurance, but stop-loss is the standard method specifically designed to cover catastrophic losses within a self-funded plan. Credit insurance and surety bonds protect different risks (payables or contractual obligations) and don’t address catastrophic claim costs in a self-insurance context.