CPHRM Insurance and Finance 4 â Questions and Answers
Question 1: A hospital is evaluating finite risk insurance. What distinguishes finite risk products from traditional insurance?
- Finite risk provides unlimited coverage with no premium
- Finite risk transfers limited risk but allows significant premium funding and investment income sharing (Correct answer)
- Finite risk applies only to property losses, not liability
- Finite risk eliminates the need for a deductible
Correct answer: Finite risk transfers limited risk but allows significant premium funding and investment income sharing
Finite risk programs transfer only a defined, limited amount of risk while allowing the insured to fund premiums over time and share in investment returns, blending risk transfer with risk financing.
Question 2: An insurance policy's 'insuring agreement' is BEST described as:
- The section listing all exclusions from coverage
- The core promise by the insurer to pay covered losses in exchange for premium (Correct answer)
- The schedule of covered locations and property values
- The conditions the insured must meet to maintain coverage
Correct answer: The core promise by the insurer to pay covered losses in exchange for premium
The insuring agreement is the heart of the policyâit defines the insurer's fundamental promise to pay, defend, or indemnify for covered claims.
Question 3: A healthcare organization uses a large-deductible liability program rather than self-insurance. The PRIMARY distinction is that under a large-deductible program:
- The insurer has no role in claims handling
- The insurer pays all claims and bills the insured for amounts within the deductible, maintaining direct insurer control (Correct answer)
- The organization retains 100% of all losses with no insurer involvement
- The deductible applies only to defense costs, not indemnity
Correct answer: The insurer pays all claims and bills the insured for amounts within the deductible, maintaining direct insurer control
In a large-deductible program, the insurer pays the full claim and then invoices the insured for the deductible portion, while maintaining claims handling authority and providing regulatory compliance benefits.
Question 4: Which actuarial method relies on historical loss ratios to project future losses by multiplying expected losses by a development factor?
- Bornhuetter-Ferguson method (Correct answer)
- Paid loss development method
- Monte Carlo simulation
- Frequency-severity method
Correct answer: Bornhuetter-Ferguson method
The Bornhuetter-Ferguson method blends a priori expected losses with actual development experience, weighting them to project ultimate lossesâcommonly used when data is immature.
Question 5: A risk manager is reviewing the hospital's directors and officers (D&O) policy. Which of the following losses would MOST LIKELY be covered under a standard D&O policy?
- A patient fall resulting in physical injury
- A shareholder lawsuit alleging misrepresentation in financial disclosures (Correct answer)
- A data breach caused by a third-party vendor
- Property damage from a fire in the medical records department
Correct answer: A shareholder lawsuit alleging misrepresentation in financial disclosures
D&O insurance covers wrongful acts by directors and officers in their management capacity, including securities claims and allegations of mismanagement or misrepresentation to shareholders.
Question 6: A hospital's excess liability policy has a 'following form' provision. This means the excess policy:
- Automatically increases limits when primary limits are exhausted without any conditions
- Adopts the same terms, conditions, and exclusions as the underlying primary policy (Correct answer)
- Provides broader coverage than the primary policy
- Requires a separate claims notification process independent of the primary insurer
Correct answer: Adopts the same terms, conditions, and exclusions as the underlying primary policy
A following form excess policy mirrors the coverage terms of the primary policy, meaning exclusions and conditions in the primary policy also apply to the excess layer.
Question 7: A risk manager evaluating the financial strength of a prospective insurer should PRIMARILY consult:
- The insurer's marketing brochures
- AM Best, Moody's, or S&P financial strength ratings (Correct answer)
- The insurer's annual advertising budget
- The number of states in which the insurer is licensed
Correct answer: AM Best, Moody's, or S&P financial strength ratings
AM Best, Moody's, and S&P provide independent financial strength ratings that assess an insurer's ability to meet its policyholder obligationsâthe most objective measure of solvency.
CPHRM Insurance and Finance 4
A hospital is evaluating finite risk insurance.
What distinguishes finite risk products from traditional insurance?