Risk Financing and Insurance Flashcards

Which risk financing goal concerns having enough liquid funds on hand to pay losses when they come due?

Answer: Maintaining liquidity

The liquidity goal makes sure that cash or near-cash assets are available when losses must be paid.

For which type of loss exposure is retention generally most appropriate?

Answer: High frequency, low severity

Frequent small losses are predictable and affordable, so retention is usually cost-effective for them.

Several unrelated organizations in the same industry jointly own a captive that insures all of their exposures. This is a:

Answer: Group captive

A group captive is owned by several organizations, often in the same industry, and insures their combined exposures.

In a rent-a-captive or protected cell arrangement, what does the participating organization avoid?

Answer: The capital commitment and administrative work of forming its own captive

Participants use an existing captive's capital and infrastructure without forming and capitalizing their own.

Which risk financing plan has a premium that stays fixed regardless of the insured's actual losses during the policy period?

Answer: Guaranteed cost insurance

Guaranteed cost insurance fixes the premium at the start and does not adjust it for the insured's losses.

A company uses a futures contract to offset losses from a rise in commodity prices. In risk financing terms, this is:

Answer: Hedging, a transfer of speculative or financial risk

Hedging with derivatives offsets financial risk by taking a position that gains when the underlying exposure loses.

What is a key advantage of an integrated (blended or multiline) risk program with a single aggregate retention?

Answer: It combines several exposures under one aggregate limit and retention, which can lower the total cost of risk

Combining exposures with imperfectly correlated losses under a single program can lower overall cost and simplify administration.