AU 67: Chapter 4 - Loss Sensitive Plans

What are the three advantages of retrospective rating for insurers?

1. Encourages insured to control losses 2. Insureds loss experience reflected in premium 3. Imposes cancellation penalties that encourage insured to stay entire term

What are 5 considerations in the formation of a captive insurance plan?

1. Feasibility study 2. Captive as re-insurer or direct writer? 3. Lines of business 4. Premium - guaranteed or retrospective? 5. Domicile - should be area that favors captives

What are four disadvantages of self-insurance?

1. Increased uncertainty 2. Admin requirements 3. Tax deductibility 4. Regulatory requirements

What are the two types of retrospective rating plans?

1. Incurred loss plans - total premium calculated at end of period based on insured's actual incurred losses (does not provide cash flow benefit to insured) 2. Paid loss plans - total premium calculated at end of period based on insurer paying losses

What are the two types of self-insurance plans?

1. Individual - one business, any business can, usually only WC, Auto, and CGL 2. Group - must be same industry, can only be used for WC and healthcare

What are two advantages of large deductible plans?

1. Insured benefits from reduced premium due to reduced state taxes, residual market loadings, and insurer overhead costs 2. Also benefits from cash flow on retained loss reserves

What are five underwriting considerations for large deductible plans?

1. Insured's loss history 2. Credit analysis 3. Quality of insured collateral 4. Admin costs 5. Producers compensation

What are the five advantages for the insured in using a retrospective rating plan?

1. Offers chance of lower net cost 2. Rewards for effective risk control 3. sets max and min with optional loss limit 4. includes traditional insurance services like claims 5. offers flexible plan designs

What are five disadvantages for the insured in using a retrospective rating plan?

1. Poses risk of uncertain final premium 2. Reduces insurers incentive to control claims cost 3. Imposes severe penalties for early cancellation 4. Affects insured's financial statements for several years due to premium adjustments 5. Insurer expenses for premium taxes and loadings added

What is a captive insurer?

A subsidiary formed to insure the risks of its parents and affiliates, to reduce cost of risk

What is a disadvantage of large deductible plans?

Increases financial uncertainty

What is a large deductible plan?

Insurance plan for WC, auto, and CGL in which deductible is at least $100,000

How does the operation of a large deductible plan work?

Insurer adjusts and pays claims, then seeks reimbursement from insured for claims below deductible amount

What is the purpose of a large deductible plan?

Lets insureds defer cash outflows for losses, lower premiums, and cash flow benefit from retained loss reserves

What is the purpose of self-insurance?

Lets organization lower long term cost of risk by paying own losses without transaction cost of insurance Best suited for high frequency, low severity, long-tail losses

What is self-insurance?

Loss retention plan that uses the business's cash flow and current assets to pay for losses Involves recording losses in formalzied system (otherwise it would be an informal retention plan)

What is a loss sensitive plan?

Rating plan that charges final premium based on insureds actual losses during policy period

What is the retrospective rating premium formula?

Retrospective rating premium = base premium + converted losses + excess loss premium) X tax multiplier

How is a large deductible plan not just a self-insured retention?

SIR sits below attachment point of policy, where insured is responsible for loss adjustment and payment

What are the three reasons for implementing a loss sensitive plan?

1. Reasons that apply to both the insurer and the insured: o A. A guaranteed cost plan is not appropriate given nature or size of risk o B. Insured is motivated to reduce losses through risk control o C. Insured's loss experience is predictable 2. Reasons that apply to insured: o A. Premium for guaranteed cost insurance is too expensive o B. Insured wants cash flow benefits from alternative risk financing technique o C. Insured wants more control over program 3. Reasons that apply to insurer: o A. Insurer wants to provide a competitive program with attractive pricing o B. Insurer's risk is reduced

What are the five advantages of captive insurers?

1. Reduced cost of insurance 2. Cash flow 3. Otherwise unavailable insurance 4. Control 5. Regulatory tax benefits

What are the three disadvantages of retrospective rating for insurers?

1. Reduces insurer's financial gain if max premium is too low 2. Products lowest profit margin of loss-sensitive plans 3. Increases pressure from insured to lower reserves

What are the six types of captive insurance plans?

1. Single parent (pure) captive - owned by one parent 2. Group captive - owned by more than one parent in same industry 3. Risk retention group - group captive where owners must be of same industry, any line except personal lines, employer liability, and WC 4. Agency captive - owned by agents or brokers 5. Rent-a-captive - insured rents capital, pays premiums, receives reimbursement for losses, and receives credit for underwriting profit/investment income, no sharing of loss costs 6. Protected cell company - like a rent a captive, each insured is protected from each other members capital and surplus

What are the seven components of the retrospective rating plan formula?

1. Standard premium 2. Basic premium- fixed cost 3. Converted losses 4. Excess loss premium 5. Tax multiplier 6. max and min premiums 7. premium adjustments

What are the five disadvantages of captive insurers?

1. Start up cost 2. Admin burden 3. Sensitivity to loss 4. Outside services 5. Tax problems

What are the three characteristics of retrospective rating plans?

1. lines of business - WC, auto, CGL 2. losses - low to medium severity, high frequency, and predictable 3. premium determination - adjusted, based on current period, with max and min premiums applied, and includes loading for overhead/profit

What are four advantages of self-insurance?

1. long term cost savings 2. increased cash flow 3. control over claims 4. encourages risk control

What are the four ideal characteristics of losses in a loss sensitive plan?

1. predictable 2. low volatility 3. low risk of catastrophe 4. high frequency/low severity - long tail is ideal