CPHRM Insurance and Finance 5 — Questions and Answers
Question 1: A hospital risk manager is asked to justify the return on investment (ROI) of the risk management program. Which metric would BEST demonstrate financial value?
- Total number of claims filed annually
- Reduction in total cost of risk year-over-year relative to program expenditures (Correct answer)
- The size of the risk management department's budget
- The number of safety training sessions conducted
Correct answer: Reduction in total cost of risk year-over-year relative to program expenditures
ROI is best demonstrated by showing that reductions in total cost of risk (losses, premiums, expenses) exceed the cost of the risk management program itself.
Question 2: Under a claims-made policy, the 'retroactive date' determines:
- The date by which all claims must be paid
- The earliest date from which an occurrence must arise for coverage to apply (Correct answer)
- The renewal date of the policy
- The date the insurer can cancel coverage without penalty
Correct answer: The earliest date from which an occurrence must arise for coverage to apply
The retroactive date sets the earliest point in time from which a covered incident can have occurred; claims arising from incidents before this date are excluded.
Question 3: A hospital self-insures workers' compensation and purchases aggregate stop-loss at 125% of expected losses. Expected losses for the year are $4 million. At what point does the stop-loss coverage activate?
- $4,000,000
- $5,000,000 (Correct answer)
- $3,200,000
- $6,000,000
Correct answer: $5,000,000
The aggregate stop-loss attachment point is 125% of $4 million = $5 million; losses exceeding this total trigger the stop-loss coverage.
Question 4: The principle of 'insurable interest' requires that for an insurance contract to be valid:
- The insured must be a licensed healthcare provider
- The insured must suffer a financial loss if the insured event occurs (Correct answer)
- The policy must cover at least three separate risk categories
- The insurer must be domiciled in the same state as the insured
Correct answer: The insured must suffer a financial loss if the insured event occurs
Insurable interest means the policyholder must stand to suffer a genuine financial loss from the event insured against, preventing insurance from becoming a wagering instrument.
Question 5: A hospital risk manager is comparing 'funded' vs. 'unfunded' retention strategies. The primary financial risk of an unfunded retention program is:
- Overfunding creates excess capital that cannot be invested
- Unexpected large losses must be absorbed from operating revenue, potentially destabilizing cash flow (Correct answer)
- Funded programs generate taxable investment income
- Unfunded programs require a higher level of reinsurance
Correct answer: Unexpected large losses must be absorbed from operating revenue, potentially destabilizing cash flow
Without pre-funded reserves, an unexpected large retained loss must be paid directly from operating funds, which can disrupt cash flow and operational stability.
Question 6: A risk manager reviewing a commercial general liability (CGL) policy notes an 'occurrence' trigger. How does this differ from a claims-made trigger for a hospital facing a long-tail liability like a medication error?
- Occurrence policies provide no coverage for long-tail claims
- An occurrence policy covers the incident whenever it is reported, as long as it occurred during the policy period (Correct answer)
- Occurrence policies have lower limits than claims-made policies
- An occurrence policy requires tail coverage when switching insurers
Correct answer: An occurrence policy covers the incident whenever it is reported, as long as it occurred during the policy period
Under an occurrence trigger, coverage applies based on when the incident happened, not when the claim is filed—so a medication error during the policy year is covered even if the lawsuit comes years later.
Question 7: A hospital CFO asks the risk manager why the actuarial loss reserve uses a 'discount rate.' The BEST explanation is:
- The discount rate reduces reserves to match competitor benchmarks
- Future claim payments are worth less in today's dollars, so reserves are adjusted to present value (Correct answer)
- Discounting inflates the reserve to account for inflation
- The discount rate is applied only to defense costs, not indemnity payments
Correct answer: Future claim payments are worth less in today's dollars, so reserves are adjusted to present value
Discounting reflects the time value of money—since claims will be paid in the future, the reserve needed today (present value) is less than the nominal sum of future payments.
CPHRM Insurance and Finance 5
A hospital risk manager is asked to justify the return on investment (ROI) of the risk management program.
Which metric would BEST demonstrate financial value?