Risk Financing and Insurance Flashcards

A manufacturer forms a wholly owned insurance subsidiary that insures only the parent's own loss exposures. What type of captive is this?

Answer: Pure (single-parent) captive

A pure captive is owned by one parent and insures only that parent's (and affiliates') exposures.

Under the federal Liability Risk Retention Act of 1986, risk retention groups may insure which type of exposure?

Answer: Commercial liability exposures

The Act permits risk retention groups to write liability coverage (other than workers compensation) for their commercial members.

Which risk financing plan lets an organization pay its own losses up to a set amount, with the insurer having no obligation to pay until that amount is exhausted?

Answer: Self-insured retention

With a self-insured retention, the insured adjusts and pays losses within the retention, and the insurer pays only above it.

In a large deductible plan, what does the insurer typically require of the insured to protect against nonpayment of deductible reimbursements?

Answer: Collateral such as a letter of credit

The insurer pays losses within the deductible and seeks reimbursement, so it requires collateral to cover credit risk.

Which of these is a component of an organization's cost of risk?

Answer: Retained losses

Cost of risk includes retained losses, insurance premiums, risk control costs, and administrative costs.

An insurer reinsures 40 percent of every policy in a line of business, and the reinsurer receives 40 percent of premiums and pays 40 percent of losses. What type of reinsurance is this?

Answer: Quota share

Quota share reinsurance cedes a fixed percentage of every policy's premiums and losses.

Which statement best describes a hold-harmless agreement used as a risk financing technique?

Answer: It moves the financial consequences of a loss to another party by contract

A hold-harmless agreement is a noninsurance transfer of the financial consequences of loss, not of the exposure itself.