Risk Financing Terms
A group captive in which each participant pays premiums and receives reimbursement for its losses from, as well as credit for, underwriting profits and investment income is called a(n)
Protected cell company.
Statutes prohibiting particular wording in risk transfer agreements are generally
Very narrow.
A property owner includes a limited form of hold-harmless agreement in his contract with a general contractor to build an office building on the property. This agreement protects the owner from
Vicarious liability for losses.
Which one of the following best describes the differences between a following-form excess liability policy and a self-contained excess liability policy?
A self-contained excess liability policy is subject only to its own provisions.
One risk financing goal is to comply with legal requirements. An example of one such legal requirement is
A state insurance law that requires the purchase of liability insurance for vehicles.
An organization that settles claims on another organization's behalf is
A third-party administrator.
An organization's total losses are assumed to be fully developed for each year after sixty-six months. This assumption probably would not be true for many liability loss exposures, including any of the following, EXCEPT:
Property damage
When forecasting losses, prior losses are adjusted to reflect inflation. The factor applied to data from previous years for this purpose is known as
trend factor
A basis for hazard risk management cost allocation that apportions costs to departments based on their pro rata share of past losses is called an
Experience-based system.
The insurance is likely to cost more per unit of coverage than it would have cost if the insurance was purchased for the organization as a whole.
Exposure bases often rely on data maintained in an accounting system.
A system of allocating hazard risk management costs based on revenues is called an
Exposure-based system.
A contractor's obligation under a service and maintenance contract is generally
Extremely broad.
All of the following are requirements of a general liability self-insurance plan, EXCEPT:
Financial reporting to state insurance departments
When the ceding commission is a fixed percentage of the ceded premium with no adjustment for the primary insurer's loss experience, the ceded commission is known as a
Flat commission.
The role of a special purpose vehicle (SPV) in a securitization is to
Purchase income producing assets and issue securities backed by those assets.
Jones Traders buys and sells stocks. Generally, Jones Traders makes money on its trades but sometimes a trade results in a loss. Which characteristic of an ideally insurable loss exposure is missing for Jones Traders' potential loss of profits from bad stock trades?
Pure Risk
An insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide is
large line capacity
A significant disadvantage of self-insurance for liability loss exposures compared to property loss exposures is that
Tax deductions for liability losses are likely to be deferred for a longer time.
The creation of a marketable insurance-linked security based on the cash flows that arise from insuring loss exposures is
. An insurance securitization.
An advantage of a self-insurance plan when compared with an insurance plan is that a self-insurance plan
. Is less expensive over the long run.
The accuracy of a self-insured organization's loss reserves is important. An understatement of the organization's loss reserves results in an
. Overstatement of net income.
My Fair City's risk manager, Mr. Penny, is developing workers compensation cost allocation system for the city. Which one of the following exposure bases of allocation would likely reflect the underlying workers compensation exposures?
. Rate relativities applied to full-time-equivalent number of employees
primary insurer is able to obtain surplus relief through reinsurance by
. Receiving ceding commissions to offset policy acquisition expenses.
Which one of the following is true about hold-harmless agreements?
A broad array of indemnity clauses are found in hold-harmless agreements.
Risk that is inherent in the operation of a particular organization, including the possibility of loss, no loss, or gain is
A business risk.
A basis for allocating hazard loss costs using the amount paid on losses during the accounting period, regardless of when they were incurred, is known as
A claims-paid basis.
In determining how much of each retained loss to allocate, the calculation of loss costs using the amount paid on losses during the accounting period, regardless of when they were incurred is
A claims-paid basis.
Sleepy Kitten Furniture Company sustains a $50,000 covered fire loss to its inventory. Sleepy Kitten's insurer pays $50,000. Most likely, Sleepy Kitten's policy has
A franchise deductible.
Which one of the following statements is correct regarding treaty reinsurance?
A long-term relationship with a reinsurer usually enables primary insurers to consistently fulfill producers' requests to place insurance with them.
A swap arrangement between two insurers produces results similar to
A reinsurance arrangement.
Which one of the following statements concerning a reinsurance intermediary (broker) is true?
A reinsurance intermediary negotiates the reinsurance agreement between the ceding company and the reinsurer.
The payment to the seller in an option compensates the seller for
Accepting the risk that it will have to pay cash to the buyer if the value of the underlying asset exceeds the strike price on an exercised option.
One major advantage of self-insurance is that it
Allows an organization to exercise direct control over claim settlement.
One facet of administering an individual self-insurance plan is cost-effective management of legal disputes. Going to court can be costly, so a variety of methods have developed to determine and assess liability without having to go to court. Collectively, these methods are called
Alternative dispute resolution techniques.
Which one of the following best defines loss severity?
Amount of a loss, typically measured in dollars
Loss frequency is the
Amount of losses, typically measured in dollars.
A reinsurance arrangement that is specified as "95% of $10 million xs $5 million" is
An excess of loss reinsurance agreement with an attachment point of $5 million, and a 5% co-participation provision of the $10 million layer.
Jameson Gasket Company entered into a retrospectively rated insurance program. The company paid a deposit premium at the start of the policy period. Jameson discovered at the end of the policy period that its incurred losses were much higher than expected. Shortly after the policy period ended, Jameson prepared its year-end financial statements. How should the additional premium due at the next adjustment be recorded on its financial statements?
As a liability on the balance sheet
A risk management professional whose insurance plan has been reinsured through a portfolio reinsurance arrangement should
Ascertain that the reinsurer is at least as financially sound as the retiring insurer.
The purpose of applying increased limit factors when estimating hazard risk is to
Assist with forecasting future large losses.
It is difficult to estimate maximum possible loss (MPL) for liability loss exposures because
Awards to injured persons may reach large totals.
An advantage of a large deductible plan is that it allows the insured organization to
Benefit from the cash flow available on the retained loss reserves.
Which one of the following statements is true regarding the risk financing goal of maintaining an appropriate level of liquidity?
Both the amount of cash to pay for retained losses and the timing of the payments are important in deciding on an appropriate level of liquidity.
Under a large deductible plan, the amount that the insurer incurs to adjust losses
Can be inside or outside the deductible.
An experience-based system of hazard risk management cost allocation for a small department could
Cause significant fluctuations in costs.
Treaty reinsurance provides primary insurers with the
Certainty needed to formulate underwriting policy and develop underwriting guidelines.
When determining a basis for allocating hazard risk management costs, once a department's claim experience has been measured by severity, its future losses and related costs can be projected using
Changes in payments plus loss reserves.
All of the following are risk financing goals, EXCEPT:
Complying with corporate policies and procedures
An organization can best analyze its loss control expenditures by
Conducting a cost-benefit analysis.
One goal of risk financing is to handle risk in a cost-effective manner. To do this, an organization seeks to minimize its total expenditures on loss control, retained losses, loss transfer costs, and administrative expenses. A composite measure encompassing all expenditures on risk is called an organization's
Cost of risk.
Excess of policy limit losses are extra-contractual obligations of the insurer. However, a feature that distinguishes excess of policy limits losses from other types of extra-contractual obligations is that they
Could have been settled within the insured's policy limits.
The organizations that use insurance-linked securities and insurance derivatives to transfer risk are concerned with the
Credit risk of the parties supplying the risk capital.
In a paid loss retrospective rating plan, cumulative paid premium tracks the
Cumulative paid losses.
A potential problem with hazard risk management cost allocation reporting systems is that
Data might be manipulated within individual departments.
An organization may use a large deductible plan to do which one of the following?
Defer cash outflows for accidental losses
Which one of the following is a disadvantage of using self-insurance rather than purchasing insurance?
Deferral of tax deductions
Departmental managers in an organization have raised concerns that there is no correlation between departmental losses and the risk management costs allocated to their units. Which purpose of a hazard risk management cost allocation system is not being fulfilled in this organization?
Distribute costs fairly
An unethical organization that uses self-insurance could manipulate its loss reserve amounts in order to minimize the volatility of its financial results over time. This practice is known as
Earnings smoothing.
Which one of the following statements concerning how enterprise risk management and traditional risk management differ is true?
Enterprise risk management focuses on the value of the organization; traditional risk management focuses on the value of the accidental losses.
When a self-insured organization incurs losses that are unpaid, it must
Establish loss reserves.
All of the following describe the difference between an excess and an umbrella liability policy, EXCEPT:
Excess liability coverage is never more restrictive than the underlying coverage.
GBB Company's general liability insurance has a $500,000 per-claim limit and a $5 million annual aggregate limit. GBB purchased excess liability insurance with a $2 million per-claim limit. A customer was injured at a GBB store and was awarded a $1.5 million judgment. The first $500,000 of the claim was covered by the general liability policy. Excess liability insurance can be written in several forms. Under which one of the following forms is the probability the greatest that the additional $1 million will be covered?
Following-form excess liability policy
A contract that obligates one party to buy and another party to sell a specific financial instrument or physical commodity at a specified future date and price is a
Forward contract.
An organization of several similar employers that have formed a not-for-profit association or corporation to which they pay premiums to manage self-insurance of their workers' compensation and healthcare benefits loss exposures is a
Group self-insurance plan.
Which one of the following explains how group self-insurance plans differ from individual self-insurance plans?
Group self-insurance plans rely on a not-for-profit association or corporation.
Within enterprise risk management, the uncertainty associated with the organization's reduction in value resulting from the effects of accidental losses is
Hazard risk.
Organizations most often use transfer plans for
High-severity and low-frequency losses.
The goal of sound risk management is to use contractual (noninsurance) risk transfers
In ways that efficiently apportion loss exposures and the loss cost for the transferor, the transferee, and the economy as a whole.
Losses that have occurred but have not yet been reported to the insurer are best known as
Incurred but not reported losses.
Delta Property Insurance Company sells personal and commercial property insurance in Arkansas, Mississippi, and Louisiana. Although the range of perils that Delta insures is broad, damage caused by flooding is expressly excluded. Which one of the following characteristics of ideally insurable loss exposures does flood damage fail to satisfy?
Independent and not catastrophic loss
Chapter 3 Summary
Insurance is an effective risk financing technique because it offers the financial certainty of risk transfer while including services that address the insured organization's need to control risks and mitigate losses. Insurance's effectiveness increases when loss exposures have certain characteristics. Organizations that want to incorporate security and certainty in their risk financing plan usually choose insurance as its primary feature. The operation of insurance relies on pooling. Pooling arrangements reduce risk without transferring it.
On which one of the following costs should a hazard risk management cost allocation system focus?
Insurance premiums
The purpose of a cut-through endorsement is to give the
Insured a direct right of action against the reinsurer.
Excess of loss reinsurance
Is used with property or liability loss exposures.
Which one of the following is true regarding failure mode and effects analysis (FMEA)?
It analyzes the severity and frequency of potential losses.
Which one of the following is a disadvantage of a large deductible plan for the insured?
Losses under the plan may be higher than expected, lowering net income.
Large deductible plans
Lower an organization's cost of risk.
The purpose of a self-insurance plan is to enable an organization to
Lower its long-term cost of risk by allowing it to pay for its own losses without incurring insurance costs.
Which one of the following is a risk classification used in enterprise risk management?
Operational risk
The availability of funds to pay for losses is important to organizations in situations in which
Operations have been disrupted.
The sacrifice of a potentially greater return from capital resources invested in a captive insurance plan is referred to as the
Opportunity cost.
Incurred losses consist of
Paid losses, loss reserves, and loss adjustment expense reserves.
With an incurred loss retrospective rating plan, the insured organization pays a premium deposit at the beginning of the policy period and
Pays an adjusted premium based on its actual losses at the end of the policy period.
Which one of the following statements is true with regard to excess of loss reinsurance?
Per policy excess of loss applies primarily to liability insurance, and per risk excess of loss applies primarily to property insurance.
One method that risk management professionals use to evaluate a self-insurance plan relative to insurance is
Present-value analysis.
Pooling changes the
Probability distribution of losses for each organization.
To determine the extent to which actual losses are likely to vary from long-term average losses, actuaries calculate the chance of outcomes falling within certain ranges of a distribution. What name is given to the chance that losses will fall between the endpoints of the range?
Probability interval
After calculating the necessary probability distributions, actuaries calculate the extent to which actual losses are likely to vary from the long-term average total losses, which are
Probability intervals.
Reinsurance pools, syndicates, and associations can be formed by
Reinsurance intermediaries to meet their clients' needs.
Gemini Insurance Company would like to purchase reinsurance for the professional liability insurance it will sell in the coming year. Which one of the following statements is true concerning the various sources of reinsurance?
Reinsurance pools (syndicates) can offer reinsurance to insurers that are not members of the pool.
Organizations with a high frequency of losses often find that their low-severity losses, taken as a whole, are highly predictable. Therefore, these organizations often handle such exposures through
Retention
A hybrid risk financing plan combines
Retention and transfer.
A noninsurance transfer in which the transferor transfers a loss exposure to the transferee, thereby eliminating the possibility that the transferor will suffer a loss from the transferred exposures is a noninsurance
Risk control transfer.
A conscious act or decision not to act that generates the funds to pay for losses or offset the variability in cash flows that may occur as an outcome of risk defines
Risk financing.
A major benefit of involving a special purpose vehicle (SPV) in a securitization transaction is that investors can decide whether to invest in the securities based on the
Risk presented by the income-producing assets held as collateral by the SPV.
A hazard risk management cost allocation system allocates losses among all of an organization's departments without considering the individual department that generated the losses is called a
Risk-sharing system.
When allocating hazard risk management costs, a common basis for measuring an organization's dominant general liability exposure is
Sales
Enterprise risk management differs from traditional risk management in that it
Seeks to enable an organization to fulfill its greatest productive potential.
An insured has a commercial general liability policy with one insurer and an excess liability policy with another insurer. There are coverage gaps due to the excess policy's independence from the underlying policy for coverage determination. Which one of the following types of excess policy does the insured have?
Self-contained excess liability policy
Specific excess liability insurance and aggregate excess liability insurance are commonly used in connection with:
Self-insured workers compensation plans.
Quota share reinsurance is a type of pro rata reinsurance in which the primary insurer and the reinsurer
Share the amounts of insurance using a fixed percentage.
The most effective way to allocate hazard risk management costs within an organization to help prioritize risk management expenditures is by
Single department.
One disadvantage associated with insurance derivatives is that they are
Sold in markets that are still underdeveloped.
Uncertainty associated with an organization's overall long-term goals and management is called
Strategic risk.
In a surety agreement, the substitution of one party for another whose debt or performance the substituting party satisfies and that entitles the substituting party to the rights that belonged to the defaulting party is
Subrogation.
In what type of pro rata reinsurance do the policies covered have amounts of insurance exceeding certain predetermined amounts?
Surplus share
One advantage of the retrospective approach to allocating hazard risk management costs is
That costs are more accurately attributed to the appropriate department. This system can subject small departments to significant fluctuations in costs from one accounting period to the next if their loss experience fluctuates significantly.
Which one of the following statements is true regarding the operation of retrospective rating plans?
The adjusted premium under a retrospective rating plan is subject to a maximum amount and a minimum amount agreed to in the policy.
A hazard cost allocation system can be prospective or retrospective. Retrospective means
The amount of costs allocated to a particular department may increase or decrease for past years, according to changes in loss experience.
After an organization determines the types and amounts of its costs of hazard risk, which it may approach prospectively or retrospectively, it must determine
The bases on which it will allocate the costs among its departments.
Which one of the following statements regarding collateral requirements and retrospectively rated insurance plans is true?
The collateral requirement may extend many years beyond the insurance policy period.
A contract for noninsurance risk transfer is not enforceable if
The contract is unconscionable.
What is the effect upon the distribution of average losses when individual losses are positively correlated?
The distribution has greater variability.
Assume that two separate organizations face identical probability distributions for expected losses. What is the effect upon each organization's expected losses and the variability of expected losses if these two organizations agree to pool their loss exposures?
The expected value of the losses will remain constant, and the variability of the expected losses will decline.
Which one of the following statements regarding the bases for hazard risk management cost allocation is true?
The exposure basis for property losses must often be adjusted to reflect loss exposures for specific properties.
Which one of the following statements concerning the practice of department managers of decentralized operations purchasing their own insurance is true?
The insurance is likely to cost more per unit of coverage than it would have cost if the insurance was purchased for the organization as a whole.
For those organizations that use the internal records of their own past losses to estimate future losses,
The law of large numbers makes such estimates more accurate the larger the organization is.
Which one of the following is a characteristic of an ideally insurable loss exposure?
The loss exposure involves pure, not speculative, risk.
Which one of the following is a characteristic of an ideally insurable loss exposure?
The loss exposure is subject to losses that are definite in time and are measurable.
One example of a cost of administering risk management activities that would likely be allocated by department is
The operating budget of the risk management department.
Which one of the following statements is true regarding a generic model of a securitization?
The organization sells income-producing assets to an SPV in exchange for cash.
As the number of pool participants increases
The probability distribution becomes bell-shaped.
Which one of the following statements is true regarding a standby credit facility?
The terms of the credit arrangement are specified in advance for a standby credit facility.
Why is it common for risk managers to obtain increased limit factors from an outside source, such as an insurance advisory group or a brokerage, rather than calculating the factors using the company's own data?
There usually is not enough company data to calculate statistically credible factors.
One of the functions of reinsurance is to increase large-line capacity. Which one of the following best describes this function from the perspective of a primary insurer?
To assume a loss exposure with potential financial consequences that are higher than its financial condition would otherwise permit
When a frequency probability distribution is combined with a severity probability distribution, the resulting distribution is known as a
Total loss probability distribution.
How do most organizations choose to deal with loss exposures that are characterized by both high severity and low frequency?
Transfer
All of the following are expenses that are part of the cost of risk, whether losses are retained or transferred, EXCEPT:
Transferred losses
A severity probability distribution is determined similarly to a frequency probability distribution but is based on the size of individual losses rather than on annual frequency figures. True
True
In a hard market, an organization may find it is not reasonable to purchase first-dollar insurance.
True
The loss conversion factor in the retrospective rating premium formula is applied to incurred losses to reflect
Unallocated loss adjustment expenses the insurer will incur.
Which one of the following types of loss exposures is commonly handled through a group self-insurance plan?
Workers compensation
Lilac Flower Company obtains all of its flowers from one grower in coastal North Carolina. If the grower's fields were damaged, Lilac Flower Company would be out of business. What risk financing technique would be most appropriate for Lilac's loss exposure?
a transfer plan
Life insurance companies commonly exclude death by suicide during the first year or two that a life insurance policy is in force. Which one of the following characteristics of an ideally insurable loss exposure does suicide fail to satisfy?
accidental loss
an annual deductible stated in a specified dollar amount
aggregate annual deductible
Which one of the following captive arrangements can generate underwriting and investment income is for the owners?
an agency captive
Organizations transferring risk through insurance-linked securities and insurance derivatives are concerned that the amount they receive if a contingency occurs may not match the amount of the loss. This risk is called
basis risk
risk that is inherent in operation of a particular organization, including possibility of loss, no loss, or gain
business risk
Mutual Fund Company operates a family of funds. In one fund, the company is able to use a variety of financial instruments to earn higher returns. One asset in the fund is 10,000 shares of XYZ common stock. XYZ currently sells for $70 per share. The fund manager does not think the price of XYZ will increase much in the next three months. She sold a financial instrument that gives the buyer the right to purchase 10,000 shares of XYZ from Mutual Fund Company at the price of $74 per share in the next three months. If the price does not increase to $74, the financial instrument will not be exercised, and Mutual Fund Company pockets the premium (price) for which it sold the financial instrument. If the price does rise, to say $76 per share, Mutual Fund Company will be obliged to sell the stock to the financial instrument owner at a price of $74 per share. The financial instrument that Mutual Fund Company sold is called a
call option
a deductible that decreases in amount as the amount of loss increases
disappearing deductible
Financial managers at First Century Savings & Loan (FCS&L) do not issue long-term, fixed-rate, mortgages when interest rates are low. They are concerned that if interest rates rise, they will have to pay a higher rate on savings than they are earning on the long-term mortgages. Through this lending policy, what type of risk is FCS&L addressing?
financial risk
a deductible stated in a certain dollar amount
flat deductible
One category of risk that enterprise risk management considers is uncertainty associated with the organization's reduction in value resulting from the effects of accidental losses. This risk is called
hazard risk
Within enterprise risk management, the uncertainty associated with the organization's reduction in value resulting from the effects of accidental losses is
hazard risk
this risk financing technique is used by organizations that risk losing money when converting from one currency to another
hedging
this risk transfer mechanism features a contractual provision that obligates one of the parties to assume the legal liability of another party
hold harmless agreements
The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposures is called a
line
a deductible that applies once to the total of all claims paid arising out of one accident or occurence
per accident or per occurence deductible
A deductible that applies to alldamages sustained by any one person or organization as a result of one occurence
per claim deductible
the deliberate assumption of risk and its consequences that has been identified and analyzed
planned retention
the international organization for standardization defines this as a form of risk treatment involving contingent arrangements for the provision of funds to meet or modify the financial consequences should they occur
risk financing
this is the inadvertent assumption of a risk that has not been identified or accurately analyzed
unplanned retention
State insurance regulation of self-insurance plans
varies by states
a statutory time period in which the injured worker must wait after an injury before the benefits can begin
waiting period deductible
Any organization can self-insure its loss exposures, provided that
. The state in which it operates permits self-insurance plans.
Which one of the following statements concerning practical considerations when selecting an allocation basis for hazard risk management costs is true?
A department's budget should not be adjusted to reflect changes in risk management results.
Increased limit factor
A factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits.
In which one of the following situations would a risk management professional deal directly with a reinsurer?
A reinsurer takes the place of an insurer as a result of a portfolio reinsurance arrangement.
Action Enterprises experiences many small losses to its inventory of plastic widgets. The losses occur from various causes, such as accidental damage, inappropriate packaging for shipment, and what appears to be bookkeeping inventory shortages. What is the most appropriate risk financing technique for these losses for Action Enterprises?
A retention plan
SLD Company operates in a state where workers compensation benefits are low. SLD self-insures its workers compensation exposure and in the past handled paying its own claims. Increasingly, workers eligible for workers compensation benefits blame SLD for the low benefits, even though SLD is adhering to state-prescribed benefit levels. SLD officials have made some mistakes in administering the workers compensation plan and failed to keep accurate records. SLD decided to hire a company called Claims Solutions to settle claims on SLD's behalf. Claims Solutions settles claims, keeps records, and performs statistical analysis of SLD's workers compensation program. Claims Solutions is
A third-party administrator.
Large deductible plan
An insurance policy with a per occurrence or per accident deductible of $100,000 or more.
Self-insurance costs can be lower than the cost of risk transfer because
An insurer's overhead costs are eliminated.
Which one of the following statements concerning practical considerations when selecting an allocation basis for hazard risk management costs is true?
An organization's accounting system can influence risk management cost allocation.
One purpose of limiting individual losses as part of the forecasting process is to
Stabilize losses.
The excess loss premium is a product of the excess loss premium factor and the
Standard premium.
If the organization wishes to pre-fund for retained future losses, it must determine the present value of the expected future losses. Calculating the present value of a future amount is known as
Discounting
Providing a high level of financial security, the value of standardized, exchange-traded options is guaranteed by the
Exchange on which they are traded.
Under which one of the following circumstances may an organization's division with lower-than-average losses prefer to rely fully on experience rather than exposure for its allocated share of hazard risk management costs for the next year?
It is able to control its losses.
In a forward contract, the buyer and seller of a commodity
Know its price prior to delivery.
Construction contracts typically hold the
Landowner harmless for certain construction-related claims.
A chemical manufacturing company has coverage under a typical commercial general liability (CGL) policy providing $1,000,000 in coverage for each occurrence. The company also has typical following-form excess liability insurance with $3,000,000 in coverage for each occurrence. A $2,000,000 loss occurs that is excluded by the CGL policy. The following-form excess liability policy would
Not cover the claim because it is not covered by the underlying policy.
Loss frequency is the
Number of losses that occur within a specified period.
One common feature of quota share reinsurance agreements is that the agreement states
One common feature of quota share reinsurance agreements is that the agreement states
Enterprise risk management (ERM) is a holistic approach to managing all of the organization's risks. One category of risk that ERM considers is uncertainty associated with the organization's overall long-term goals and management. This type of risk is
Strategic Risk
One step in forecasting expected losses based on historical data is to limit individual losses. Which one of the following occurs as a result of limiting individual losses?
The forecaster is better able to match losses to the layer that is being forecast.
Which one of the following standards has the Internal Revenue Service applied in recent years in determining whether the premium paid by a parent company to its captive is tax deductible?
The third-party business test—if the captive writes enough nonparent business, the premium is tax deductible
Under a per occurrence excess of loss treaty, the attachment point and the reinsurance limit apply to
The total losses arising from a single event affecting one or more policies.
Metro City Power Company has agreed to pay Industrial Equipment Repair (IER) $680,000 for repairs to one of the turbines in its hydroelectric power plant. The turbine was removed from the plant by Industrial Equipment Repair (IER) and the repairs will be completed over a four-month period. Which one of the following statements concerning the transaction between Metro City Power Company and IER is true?
The transaction is an example of a mutual benefit bailment.
Which one of the following statements is true regarding the value of an insurance option?
The value of an insurance option increases as the underlying insurable losses increase beyond the value of the strike price.
Trigon Company is a small pharmaceutical company that is not doing well financially. It has received large loans from Sixth National Bank. The only affordable products liability insurance Trigon could find was from Atlas Insurance. Atlas has received weak financial ratings from two ratings services. As per the terms of the loan agreement, Sixth National was consulted about placement of the products liability insurance. Atlas planned to reinsure most of Trigon's business. Sixth National demanded that the products liability insurance include an endorsement allowing Trigon to collect directly from the reinsurer if Atlas became insolvent. This endorsement is called
cut through endorsement
IIA Insurance has a 95% of $20 million xs $1 million catastrophe excess of loss reinsurance treaty with Mega Reinsurer. Assuming IIA sustains a $15 million catastrophe loss subject to the treaty, how much will IIA retain?
$1,700,000 ( 1,000,000 + (14,000,000 × 5%) = 1,700,000; Assuming IIA sustains a $15 million catastrophe loss subject to the treaty, IIA will retain $1,700,000.)
An excess liability insurance policy that applies to a loss that exceeds the underlying limits only if the loss is also covered under the provisions of the excess liability insurance policy is called
A self-contained excess liability policy.
When allocating hazard risk management costs, a practical consideration when selecting an allocation basis for a department with a $20 million budget is that
A small aggregate cost of hazard risk would be insignificant.
A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them and then using those assets to collateralize securities that will be sold to investors is
A special purpose vehicle.
After purchasing workers compensation insurance for many years, Keller Manufacturing decided to self-insure the exposure. Shortly after switching to self-insurance, Keller financial managers realized they had no claim settlement expertise and that some hostility toward the company was developing among injured workers. Keller contacted the insurer it had used previously to insure the workers compensation risk. They entered into an agreement with the insurer through which Keller will continue to self-insure the exposure, but the insurer will handle claims administration. Such an agreement is called
An administrative services only plan.
Following a string of large product liability jury awards, a number of large insurers in the products liability insurance market temporarily withdrew. As a service to its clients that were having difficulty obtaining product liability insurance, a national brokerage company established a captive insurance company to write products liability insurance for its clients. This type of captive is
An agency captive.
A facultative reinsurance agreement is written for a specified time period
And cannot be cancelled by either party unless contractual obligations, such as payment of premiums, are not met.
The purpose of the risk transfer portion of a retrospective rating plan premium is to
Compensate the insurer for limiting the amount of covered losses included in the plan's premium adjustments.
A liability on an insurer's balance sheet that shows the estimated amount that will be required to settle claims that have occurred but that have not been paid is called the
Loss reserves.
Begley Company insured its auto liability exposure through a retrospectively rated plan for a calendar year. Auto liability losses for the calendar year were: $120,000, $20,000, $50,000, $180,000, and $70,000. The retrospectively rated plan had a policy limit of $500,000 per-loss, a loss limit of $50,000 per loss, and a maximum aggregate retention of $250,000. What are Begley's retained losses for the calendar year under this plan?
Losses are limited at $50,000, so the loss amounts are 50,000 + 20,000 + 50,000 + 50,000 + 50,000 = 220,000; Begley's retained losses for the calendar year are $220,000.
To achieve the financial goal of maximizing market value, most publicly traded organizations should pursue risk financing goals. Common risk financing goals include which one of the following?
Manage uncertainty of loss outcomes
Which one of the following statements concerning the policy forms used by insurers to provide excess liability and umbrella liability coverage is most accurate?
Many insurers do not use standardized policies for excess and umbrella liability policies, and the policies vary considerably in the coverages they offer.
Which one of the following statements is true about balancing risk-bearing and risk-sharing in a hazard risk management cost allocation system?
Most risk management cost allocation systems are a combination of risk-bearing and risk-sharing systems.
Which one of the following statements is correct regarding the use of treaty and facultative reinsurance?
Most treaties require that all loss exposures within the treaty's terms be reinsured.
Sale and supply contracts can substantially modify the common law that distributes loss exposures between property buyers and sellers. With no modification common law indicates that risk of loss, both to the property and from the property's loss of use,
Moves with the property's title.
Regarding options, the strike price is the
Specific price at which the holder of an option can buy or sell the asset associated with the option.
Which one of the following concerns should an organization consider when using a Special Purpose Vehicle (SPV) to generate cash from income-producing assets?
The organization must maintain a high level of disclosure regarding the SPV's assets.
Which one of the following statements about excess liability insurance coverage and umbrella liability insurance coverage is most accurate?
Umbrella liability policies typically provide primary coverage for certain types of losses not covered by other insurance, while excess liability policies typically do not.
When allocating the costs of accidental losses not reimbursed by insurance or other outside sources, a hazard risk management cost allocation system should consider
Unallocated loss adjustment expenses.
Which one of the following is true regarding hazard risk evaluation?
When a hazard risk loss occurs it does not usually increase the likelihood of events from other types of risk.
Which one of the following statements concerning the reinsurance concerns of risk management professionals is true?
Which one of the following statements concerning the reinsurance concerns of risk management professionals is true?