Stop Loss insurance allows an employer to pay a certain amount of health costs out of pocket and allows for the insurance company to cover the costs over your prescibed amount. This option was originally invented by large corporations who found it made more sense to self insure their companies, and pay a small insurance premium for catastrophic events. This is a great alternative option to the traditional insurance plans.
Check out the below illustrations that further describe how the plans work.
Above: Money sits in reserve until it is needed for a claim. If at the end of the year there hasn't been a claim higher than the stop loss, money is returned to the plan company/sponsor
Above: The Company has placed a stop loss of $1000. Three employees have spent more than the stop loss, which amount the insurance company would kick in to pay the claims. The remaining three employees who have not spent up to the stop loss. The difference between their claims and stop loss be returned in cash.