CPHRM Insurance and Finance 3 — Questions and Answers
Question 1: An occurrence-based medical malpractice policy with a $1M/$3M limit structure means:
- $1M per physician and $3M per facility per year
- $1M maximum per individual claim and $3M maximum for all claims during the policy year (Correct answer)
- $1M deductible per claim and $3M annual aggregate deductible
- $1M in defense costs and $3M in indemnity payments
Correct answer: $1M maximum per individual claim and $3M maximum for all claims during the policy year
The per-occurrence limit ($1M) caps payment on any single claim, while the aggregate limit ($3M) caps total payments for all claims during the policy period.
Question 2: A risk financing strategy that spreads retained losses over time through annual contributions to a dedicated fund best describes:
- Commercial insurance transfer
- Risk retention group participation
- Funded self-insurance reserve (Correct answer)
- Finite risk insurance
Correct answer: Funded self-insurance reserve
A funded self-insurance reserve accumulates contributions each year to pay retained losses, smoothing cash flow rather than funding each loss as it occurs.
Question 3: Under GASB standards applicable to public hospital self-insurance programs, claim liabilities must be reported when:
- A lawsuit is formally filed in court
- It is probable a loss has occurred and the amount can be reasonably estimated (Correct answer)
- The claim is settled and a check is issued
- The board of directors formally approves the payment
Correct answer: It is probable a loss has occurred and the amount can be reasonably estimated
GASB standards require recognizing a liability when it is probable that a loss has been incurred and the amount can be reasonably estimated, regardless of whether litigation has begun.
Question 4: A risk manager reviews an actuarial loss reserve study. The actuary uses an 'ultimate loss' estimate rather than paid losses. Why is ultimate loss the more appropriate figure for funding decisions?
- It is always smaller than paid losses, reducing reserve requirements
- It includes both paid amounts and estimated future payments on open and IBNR claims (Correct answer)
- It excludes defense costs to provide a cleaner liability estimate
- It uses only the most recent three years of data to minimize volatility
Correct answer: It includes both paid amounts and estimated future payments on open and IBNR claims
Ultimate loss includes paid amounts, case reserves on open claims, and incurred-but-not-reported (IBNR) estimates, giving the full projected cost of all claims from a period.
Question 5: Which type of reinsurance protects a self-insured health system against an unusually high volume of individual losses in a single year, rather than a single catastrophic loss?
- Specific (per-occurrence) excess reinsurance
- Aggregate excess (stop-loss) reinsurance (Correct answer)
- Facultative reinsurance
- Treaty reinsurance
Correct answer: Aggregate excess (stop-loss) reinsurance
Aggregate excess (stop-loss) reinsurance triggers when total losses across all claims in a period exceed a set threshold, protecting against a bad year rather than any one large loss.
Question 6: A hospital's risk retention group (RRG) differs from a standard commercial insurer primarily because:
- RRGs can write any line of insurance in any state
- RRGs are owned by and insure only members who face similar liability risks (Correct answer)
- RRGs are exempt from all state insurance regulations
- RRGs do not require actuarial certification of reserves
Correct answer: RRGs are owned by and insure only members who face similar liability risks
Under the Liability Risk Retention Act, RRGs are member-owned entities that insure only their members, who must share a common business or liability exposure.
Question 7: A risk manager calculates the 'cost of risk' for an annual report. Which of the following expenses should be INCLUDED in this calculation?
- Revenue from hospital services
- Insurance premiums, retained losses, risk management department costs, and administrative expenses (Correct answer)
- Capital expenditures for new medical equipment
- Interest payments on long-term bonds
Correct answer: Insurance premiums, retained losses, risk management department costs, and administrative expenses
Cost of risk encompasses all expenses attributable to managing risk: premiums paid, losses retained (paid out-of-pocket), and the internal costs of operating the risk management function.
CPHRM Insurance and Finance 3
An occurrence-based medical malpractice policy with a $1M/$3M limit structure means: