CPHRM Insurance and Finance 2 — Questions and Answers
Question 1: A hospital switches from a claims-made policy to an occurrence policy. What does the hospital need to purchase to cover claims arising from incidents that occurred during the claims-made period but are reported after the switch?
- Umbrella coverage
- Tail coverage (extended reporting endorsement) (Correct answer)
- Nose coverage
- Excess liability coverage
Correct answer: Tail coverage (extended reporting endorsement)
Tail coverage (extended reporting endorsement) extends the reporting window of a claims-made policy to capture incidents that occurred during the policy period but are reported after it ends.
Question 2: A health system is evaluating a captive insurance program. Which of the following is the PRIMARY financial advantage of a captive?
- Eliminates the need for actuarial services
- Allows the organization to retain underwriting profit (Correct answer)
- Provides unlimited coverage for catastrophic losses
- Removes regulatory oversight of premium payments
Correct answer: Allows the organization to retain underwriting profit
A captive allows the parent organization to retain underwriting profits that would otherwise go to commercial insurers when losses are lower than premiums collected.
Question 3: Under a retrospective rating plan, the final premium is determined by:
- Projected losses set at policy inception
- Actual losses during the policy period, subject to minimum and maximum limits (Correct answer)
- A fixed percentage of payroll regardless of claims
- The insurer's discretion at policy renewal
Correct answer: Actual losses during the policy period, subject to minimum and maximum limits
Retrospective rating adjusts the final premium based on the insured's actual loss experience during the policy period, bounded by a contractual minimum and maximum.
Question 4: A risk manager notices that the hospital's general liability policy contains a 'subrogation waiver' clause for certain contractors. What does waiving subrogation mean?
- The insurer gives up its right to pursue a third party for reimbursement after paying a claim (Correct answer)
- The hospital agrees to defend the contractor in all lawsuits
- The insurer waives the deductible on the contractor's behalf
- The contractor's policy becomes primary over the hospital's policy
Correct answer: The insurer gives up its right to pursue a third party for reimbursement after paying a claim
Waiving subrogation means the insurer surrenders its legal right to recover from a responsible third party after indemnifying the insured, preventing it from suing the named contractor.
Question 5: Which financial statement metric is MOST useful for a risk manager assessing whether a self-insured trust fund has adequate liquidity to pay near-term claims?
- Return on equity
- Current ratio (Correct answer)
- Price-to-earnings ratio
- Debt-to-equity ratio
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) measures short-term liquidity, indicating whether a fund has sufficient liquid assets to cover near-term claim payments.
Question 6: A hospital's self-insurance program purchases specific stop-loss coverage at $500,000 per occurrence. A single malpractice claim is settled for $1.2 million. How much does the stop-loss carrier pay?
- $500,000
- $700,000 (Correct answer)
- $1,200,000
- $0, because stop-loss only covers aggregate losses
Correct answer: $700,000
Specific stop-loss covers losses above the per-occurrence retention; the hospital retains the first $500,000 and the stop-loss carrier pays the remaining $700,000.
Question 7: A risk manager is negotiating an indemnification clause in a vendor contract. The clause requires the vendor to 'hold harmless and indemnify' the hospital. Which additional contractual requirement BEST reinforces this protection?
- Requiring the vendor to obtain a performance bond
- Requiring the vendor to name the hospital as an additional insured on its liability policy (Correct answer)
- Requiring the vendor to purchase directors and officers coverage
- Requiring the vendor to waive its right to arbitration
Correct answer: Requiring the vendor to name the hospital as an additional insured on its liability policy
Naming the hospital as an additional insured on the vendor's policy ensures direct coverage under the vendor's insurer, providing a financial backstop to the contractual indemnity obligation.
CPHRM Insurance and Finance 2
A hospital switches from a claims-made policy to an occurrence policy.
What does the hospital need to purchase to cover claims arising from incidents that occurred during the claims-made period but are reported after the switch?