Stop Loss Basics: What Are Rate Caps?
This is the second article in our Stop Loss Basics series. If you missed our first article, you can read it now: Understanding Leveraged Trend.
Many Stop Loss providers offer Rate Caps as an option to their customers. What is a Rate Cap, anyway, and should you select one for your Stop Loss policy? The answer – it depends.
Many Stop Loss providers, including Berkley Accident and Health, offer Rate Caps as an option to their customers. What is a Rate Cap, anyway, and should you select one for your Stop Loss policy? The answer – it depends.
What Are Rate Caps?
Here are the most important things to know about Stop Loss insurance Rate Caps:
- Rate Caps limit the amount that premiums can increase the following year, regardless of your claims experience. Stop Loss insurance is typically a manually-rated product, meaning that premiums are based on standardized rate tables, or manuals, developed from large pools of historical claims data. These manuals allow insurers to provide pricing based on broad factors like age, gender, geography, and benefit design, and not on the group’s own claims history.
In some scenarios, manual rating can be blended with experience rating, meaning that the insurer will consider the group’s future known risks, loss history, and changes in risk profile when setting the rates.
In essence, a Rate Cap transfers the policyholder’s future risk of higher rates onto the insurer. - Rate Caps are often bundled with a “No New Lasers at Renewal” provision. This provision ensures that a higher Specific Stop Loss deductible, or other coverage limitation, will not be imposed on certain individuals at renewal. If an existing laser is already in place, this provision also ensures that the higher deductible won’t be increased at renewal.
A No New Laser provision is another way of transferring future risk from the policyholder onto the insurer. - Typically, a policyholder will pay a slightly higher premium to add a No New Lasers with Rate Cap provision to their Stop Loss policy. This protects the policyholder from higher liability next year in exchange for a known premium surcharge today.
Think of it like “accident forgiveness” with auto insurance: you pay more now so you don’t have to pay more later. - No New Lasers with Rate Cap provisions are not guaranteed past the next renewal. Typically, these provisions provide protection for only one renewal from the policy issue date and are not a perpetual guarantee.
Should You Select a Rate Cap?
Pros
- For employers with a lower tolerance for risk, a Rate Cap can be a welcome option. They want to know that their premiums are not going to rise too sharply next year, and that newly emerging claims will not be lasered. They are willing to pay extra this year to make sure that does not happen.
- Because Rate Caps are typically bundled with a No New Lasers at Renewal provision, they also protect against higher deductibles on individuals with known large claims. It is comparatively rare to see a Rate Cap without a No New Lasers provision.
- Rate Caps can make self-funding more predictable and therefore, more accessible for smaller employers. They are another tool to smooth the volatility that can be associated with self-funding.
Cons
- For companies with a higher tolerance for risk, a Rate Cap may not be desirable. Companies with more available cash, steady cash flows, and wider margins may not see the extra protection as quite so important.
Pitfalls to Avoid
When selecting a Rate Cap, it’s important to make sure there are no strings attached.
For example, raising your Specific deductible can be a smart move in times of medical inflation. It is an effective way to offset the leveraged trend effect by assuming more risk in exchange for lower premiums.
However, when a higher Specific deductible or an Aggregating Specific deductible is imposed on a policyholder to preserve the Rate Cap, that should be a red flag. Either the Rate Cap was not realistic or the rate adjustment was too low, and the Stop Loss carrier is now requiring the policyholder to assume more risk.
So, Are Rate Caps Good or Bad?
The short answer is – it depends.
In risk management circles, it’s widely recognized that retaining risk can be more cost-effective than transferring it, especially in the long term. This is due to the added costs embedded in the risk transfer of insurance premiums, such as administrative expenses, profit margins, and contingency reserves.
Let’s return to our auto insurance example. If an auto insurance policy covered the cost of routine expenses, such as oil changes, maintenance, and gas, would you buy it? Or would you look at those small, predictable expenses and decide you can cover them yourself more affordably? After all, outsourcing those costs to an insurer that has to pay for employee salaries, overhead, advertising costs, etc. means paying a significant markup on those routine expenses.
What’s Best for Your Company?
Every company has to strike the right balance between retaining and transferring risk. And every business has a different appetite for risk.
For many organizations, especially large or diversified ones, retaining risk can result in a lower total cost of risk over time, compared to transferring it through insurance.
But for smaller, more concentrated organizations, the volatility of retained risk can be hard to handle. This is especially the case in self-funded health plans, as the incidence of $1+ million claims has steadily increased over the years.4 Smaller organizations may not have enough cash on hand to pay for these claims, even if the long-term total cost of risk is lower.
Even the fluctuations in Stop Loss premiums may prove unmanageable for some companies, and this is where Rate Caps come in. For companies worried about volatility, joining a Group Captive program can be another potent tool. They have a proven track record for smoothing Stop Loss rate increases, as described in our 2025 Captive Impact Study.
To learn more about our No New Special Limitations and Rate Cap Endorsement, contact your Berkley Accident and Health representative.
| Retaining vs. Transferring Risk |
|---|
| Leading risk management thinkers agree that when organizations can retain, rather than transfer, risk, there are many financial benefits. According to Harrington and Niehaus,1 firms that retain all types of risk avoid additional costs and may benefit from improved cash flow and investment income. Rejda and McNamara2 emphasize that predictable, low-severity losses are often better retained, especially by organizations with strong loss control programs and sufficient financial capacity. Lam3 supports this view from an enterprise risk management perspective, noting that internal risk financing aligns with long-term value creation and capital efficiency. |
1 Harrington, S. E., & Niehaus, G. R. (2004). Risk Management and Insurance (2nd ed.). McGraw-Hill/Irwin.
2 Rejda, G. E., & McNamara, M. J. (2021). Principles of Risk Management and Insurance (14th ed.). Pearson.
3 Lam, J. (2014). Enterprise Risk Management: From Incentives to Controls (2nd ed.). Wiley.
4 Risk & Insurance, Million-Dollar Medical Claims Soar, Putting Employers Under Pressure, June 9, 2025, https://riskandinsurance.com/million-dollar-medical-claims-soar-putting-employers-under-pressure/
Stop Loss is underwritten by Berkley Life and Health Insurance Company and/or StarNet Insurance Company, both member companies of W. R. Berkley Corporation and rated A+ (Superior) by A.M. Best, and involves the formation of a group captive insurance program that involves other employers and requires other legal entities. Berkley and its affiliates do not provide tax, legal, or regulatory advice concerning EmCap. You should seek appropriate tax, legal, regulatory, or other counsel regarding the EmCap program, including, but not limited to, counsel in the areas of ERISA, multiple employer welfare arrangements (MEWAs), taxation, and captives. EmCap is not available to all employers and may not be available in all states. Payment of claims under any insurance policy issued shall only be made in full compliance with all United States economic or trade and sanction laws or regulation, including, but not limited to, sanctions, laws and regulations administered and enforced by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”).
BAH AD 2025-218 © Berkley Accident and Health 11/25
Stop Loss Basics: What Are Rate Caps? was last modified: November 20th, 2025 by