RMI Test 2
Retrospective Rating Plans purpose & operation
1. Adjust the premium for guaranteed cost insurance to reflect the insured organizations current losses. 2. Rather than using past losses or industry wide loss experience, this plan uses the losses from the current policy period to price the current policy period 3. This provides an incentive for loss control. Lower losses = lower premium
Risk Retention Group
A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations.
Association Captive
A group captive sponsored by an association.
Law of Large Numbers
A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.
Individual Self Insurance Plan
A retention plan that involves only one organization. Must satisfy regulatory requirements set by the state for WC, GL, and Auto
Prouty Approach
A risk exposure analysis method that suggests how to treat loss exposures by classifying loss frequency and loss severity into broad categories.
Agency Captive
A type of group captive that is owned by insurance agents or brokers rather than by the organizations insured.
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
Deductible
Amount you must pay before you begin receiving any benefits from your insurance company
Rent-a-captive
An arrangement under which an organization rents capital from a captive, to which it pays premiums and receives reimbursement for its losses.
Self-insured plan
An insurance plan funded by an organization having a large enough employee base that it can afford to fund its own insurance program.
Partial Retention
Assumption of a portion of the cost of a loss by the organization and transfer of the remaining portion
Complete Retention
Assumption of the full cost of any consequences that are retained by the organization
All of the following are risk financing goals, EXCEPT: A. Managing uncertainty of loss outcomes B. Complying with corporate policies and procedures C. Maintaining an appropriate level of liquidity D. Paying for negative financial consequences of an event
B
Under a large deductible plan, the amount that the insurer incurs to adjust losses
Can be inside or outside the deductible.
An organization gets the most risk management value by
Combining insurance with non-insurance techniques
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.
Several similar small businesses in a state formed a not-for-profit organization. The businesses pay premiums to the organization, and it manages the businesses' planned retention program for workers compensation. The organization pools the loss exposures of the members. The administrator of the organization collects premiums, manages claims, purchases excess insurance, and makes necessary regulatory filings. The organization described is a
Group self-insurance plan.
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.
How can you transfer risk without issuance of an insurance policy?
Hold harmless agreement
The primary role of insurance is to
Indemnify individuals and organizations for covered losses
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.
Unfunded Retention
Lack of advance funding for the consequences of an event that occurs
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.
The goal of managing financial risk
Market Risk, Liquidity Risk, Credit Risk, Price Risk
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.
Funded Retention
Pre-event arrangement to ensure that funding is available to pay for the consequences of an event after it occurs
Covered under the GL Policy
Premises, Operations, Products, Completed Operations, Written Contracts and Agreements, Personal Injury, Advertising Industry, Medical Payments
An amount charged to make up for losses in a state-sponsored plan to insure high-risk exposures, such as an assigned risk plan for auto insurance is known as the
Residual market loading.
For hazard risks, a form of risk financing when there is an internal fund within the organization to pay the cost of losses is
Retention
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
Self-insurance is a form of
Retention under which an organization records its losses and maintains a formal system to pay them.
Jackson Enterprises, Inc. is a medium-sized manufacturer of wooden widgets. Because Jackson purchases only basic insurance coverage in order to keep premiums at a minimum, Jackson frequently has small property losses that insurance does not cover. Which one of the following insurer-provided services would be most beneficial for Jackson?
Risk control services
Which one of the following statements is true regarding the purpose and operation of self-insurance plans?
Self-insurance best applies to losses that are somewhat predictable in total over a defined time period.
Group Self Insurance Plan
Several employers from a not for profit organization or association. Typically from smaller industries. Loss exposures of all members are pooled. Benefits of companies that are too small to self-insure on their own. There are more stringent state requirements for group self insurance.
Hard Markets
diminished competition for insurers causing, buyers to have a difficult time finding coverage, price increases, and insurer profitability rises
Soft Market
intense insurer competition causing, loose standards, low premiums, favorable insurance terms, less retention
Planned Retention
is a deliberate assumption of a risk (and it's consequences) that has been identified and analyzed. chosen because it is cost effective, convenient, or the only option.
Unplanned Retention
is the inadvertent assumption of a risk (and any consequences) that has not been identified or accurately analyzed. Example: flood losses b/c they don't anticipate torrential rain with hurricanes
All of the following are characteristics of ideally insurable loss exposures, EXCEPT: A - Large concentration of financial capacity B - Large number of similar exposure units C - Losses that are accidental D - Losses that are definite and measurable
large concentration of financial capacity
Risk Financing Goals
pay for consequences of a negative event, maintain liquidity, manage uncertainty, comply with laws, minimize the cost of risk
Purpose of Captive
reduce the parent company's cost of risk
A hybrid risk financing plan combines
retention & transfer
different types of captives?
single parent (pure) , group, association, risk retention, Rent-A-Captive, Protected Cell
Uncertainty associated with an organization's overall long-term goals and management is called
strategic risk
What is a captive?
subsidiary formed by a parent company to insure the loss exposures of the parent company and the parent's affiliates
Special Purpose Vehicle
subsidiary of a company which is protected from the parent company's financial risk.
Pooling of losses
the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss
Risk Transfer
transfer of risk through insurance or non insurance techniques such as a contrast. Financial responsibility for losses and variability in cash flows is shifted to another party.
Brown Bell Company sustains a $7,500 covered loss to its building. The insurer pays $5,000. Most likely, Brown Bell's policy has
A $2,500 flat deductible
Group Captive
A captive insurer owned by a group of companies, usually operating similar businesses, rather than a single parent.
Single-parent captive (pure captive)
A captive insurer owned by one company that insures all or part of the loss exposures of that company or its subsidiaries.
Protected cell company (PCC)
A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall company
Soy Products Company (SPC) makes and sells various soy products, and the company has products liability insurance to address its exposures. Last year, the company was sued twice by consumers alleging the company sold tainted soy cheese and tainted soy milk baby formula. The insurer settled these claims out of court, rather than fight them. Once news of the out of court settlement in the baby formula case leaked to the public, six more similar claims were filed. The risk manager of SPC has been trying to convince the CEO to switch from purchasing private insurance to self-insuring part of the exposure. Which one of the following advantages of self-insurance provides the most convincing argument, given SPC's recent experience with its private insurer?
Control over claims
Advantages of Self Insurance plans
Control over claims, loss control, long-term cost savings, cash flow benefits
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
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
Enron Scandal
Enron had manipulated energy prices in California to create a fake crisis, along with other illegal deceptions. These illegal acts were unearthed after the company filed for bankruptcy in 2001. This caused the California governor, Gray Davis, to be replaced with Arnold Schwarzenegger.
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.
As a general rule, which one of the following correctly describes how excess and umbrella liability policies would respond to a loss not covered by the underlying primary liability insurance?
The excess policy would not cover the loss, but the umbrella policy may, subject to the self-insured retention.
Loss Frequency is
The number of losses that occur within a specified period.
XYZ Office Supplies is a retail store featuring a wide variety of office supplies. XYZ operates in a large city and has not expanded beyond one store. Its annual revenues are $1.5 million, and it has 16 employees. XYZ has an extensive and highly effective loss control program for employee injuries. Because of its excellent safety record and low incidence of losses, XYZ is interested in self-insurance. Which one of the following statements is most accurate for XYZ's workers' compensation exposure?
XYZ may be able to participate in a group self-insurance plan for its workers' compensation exposures.
Risk Retention
can be planned, unplanned, complete, partial, funded and or unfunded
what does a captive do?
collects premiums, issues policies, and pays covered losses. most buy reinsurance to transfer losses to another insurer.
catastrophe bonds
corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
