The risk characteristics of medical stop-loss make it a reasonable exposure to place in a captive insurer because of the relatively limited nature of the risk and short duration of payment. There are potentially significant cost savings and other administrative advantages to be realized.
Although losses may occur in a particular year, over time cost should be less to retain stop-loss in a captive than to insure that risk in the external commercial stop-loss markets.
When calculating administrative expenses, the target loss ratio used by an underwriter of a commercial medical stop-loss policy will be 65-to-75 percent–reflecting substantial administration expenses and underwriting gains for the stop-loss underwriter.
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