Important Concepts (CH4)

Question 1

The five common risk financing goals

Answer 1

1. Pay for losses
2. Manage the cost of risk
3. Manage CF variability
4. Maintain appropriate level of liquidity
5. Comply with legal requirements

Question 2

Forms of retention

Answer 2

1. Planned - intentional form of financing risks that have been adequately identified and analyzed
2. Unplanned - occurs either when losses cannot be insured or when an individual fils to identify/assess a loss exposure

Question 3

Retention

Answer 3

can be the most economical form of risk financing, yet exposes the company/person to the greatest CF variability

Question 4

Four measures to fund retention

Answer 4

1. Current expensing of losses - current CF cover losses
2. Unfunded loss reserve - mere accounting entry denoting a potential liability
3. Funded reserve - supported with cash and other liquid assets to can be used to pay for losses
4. Borrowing funds - reduces line of credit

Question 5

Benefits of retention

Answer 5

1. Cost savings
2. Control of the claim process
3. Timing of CF
4. Incentives for risk control

Question 6

Benefits of transfer

Answer 6

1. Reducing exposure to large losses
2. Reducing CF variability
3. Providing ancillary services
4. Avoiding adverse employee and public relations

Question 7

When to retain?

Answer 7

Low severity, low frequency AND low severity, high frequency

Question 8

When to transfer?

Answer 8

High severity, low frequency

Question 9

Guaranteed cost insurance

Answer 9

insurance policy in which the premium and limits are specified in advance

Question 10

Self-insurance

Answer 10

form of retention which an organization records its losses and maintains a formal system to pay for them (usually used for high frequency loss exposures)

Question 11

Large Deductible Plan

Answer 11

insurance policy with a per occurrence or per accident deductible of $100K or more

Question 12

Captive insurers

Answer 12

subsidiary formed to insure the loss exposures of its parent company and its parent’s affiliates

Question 13

Finite risk plan

Answer 13

risk financing plan that transfers a limited amount of risk to an insurer

Question 14

Pools

Answer 14

group of organizations that insure each other’s loss exposures. Each member of the pool pays premium based on its loss exposures, the pool then pays for the covered losses

Question 15

Retrospective rating plan

Answer 15

risk financing plan under which an organization buys insurance subject to a a rating plan thats adjusts the premium rate after the end of the policy period based on a portion of the insured’s losses during the period

Question 16

Hold-harmless agreement

Answer 16

contractual provision that obligates one of the parties to assume the legal liability of another party

Question 17

Capital market solutions

Answer 17

a financial market in which bonds and other financial assets having a maturity of more than a year are bought and sold

Question 18

Primary layer

Answer 18

The first layer of insurance coverage above any deductible

Question 19

Excess layer

Answer 19

level of insurance coverage above the primary layer

Question 20

Umbrella policy

Answer 20

liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies

Question 21

Derivative

Answer 21

financial contract that derives its values from the value of another asset

Question 22

Contingent capital arrangement

Answer 22

an agreement before a loss occurs that enables an organization to raise cash by selling stock or bonds at prearranged terms after a loss occurs that exceeds a certain threshold