ARM Risk Financing and Insurance 2

Question 1

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

Accepted Answer

Pure (single-parent) captive

Answer

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

Question 2

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

Accepted Answer

Commercial liability exposures

Answer

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

Question 3

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?

Accepted Answer

Self-insured retention

Answer

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

Question 4

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

Accepted Answer

Collateral such as a letter of credit

Answer

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

Question 5

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

Accepted Answer

Retained losses

Answer

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

ARM - Associate in Risk Management Practice Test

ARM - Associate in Risk Management Practice Test

ARM Risk Financing and Insurance 2