CRIS CRIS Risk Financing & Insurance Programs 2 — Questions and Answers
Question 1: What is the primary purpose of a construction wrap-up insurance program?
- To eliminate the need for bonding on public projects
- To consolidate coverage for all project participants under a single program, reducing gaps and overlaps (Correct answer)
- To transfer all project risk to the owner's general liability insurer
- To replace professional liability coverage for design-builders
Correct answer: To consolidate coverage for all project participants under a single program, reducing gaps and overlaps
Wrap-up programs centralize insurance purchasing for a project, eliminating coverage gaps, reducing duplicate premiums, and improving claims coordination.
Question 2: Which coverage is commonly EXCLUDED from most OCIP/CCIP wrap-up programs?
- General liability
- Workers' compensation
- Professional liability (errors & omissions) (Correct answer)
- Builders risk
Correct answer: Professional liability (errors & omissions)
Professional liability is typically excluded from wrap-up programs because design errors are project-specific and require separate, firm-specific E&O policies.
Question 3: A self-insured retention (SIR) differs from a deductible primarily in that:
- An SIR is paid by the insurer who then seeks reimbursement; a deductible is paid by the insured upfront
- With an SIR the insured defends and pays claims up to the retention amount before insurer involvement; a deductible is reimbursed to the insurer after payment (Correct answer)
- An SIR applies only to property losses; a deductible applies only to liability
- There is no practical difference between an SIR and a deductible
Correct answer: With an SIR the insured defends and pays claims up to the retention amount before insurer involvement; a deductible is reimbursed to the insurer after payment
Under an SIR, the insured handles claims and legal defense within the retained amount independently; the insurer's duty to defend only triggers above the SIR.
Question 4: Which metric is most commonly used to evaluate the financial performance of a captive insurance company?
- Premium volume written
- Combined ratio (loss ratio + expense ratio) (Correct answer)
- Number of policies issued
- Reinsurance ceded percentage
Correct answer: Combined ratio (loss ratio + expense ratio)
The combined ratio measures underwriting profitability; a combined ratio below 100% indicates the captive is paying out less in losses and expenses than it collects in premiums.
Question 5: Fronting arrangements in captive programs are used primarily to:
- Avoid state insurance regulations entirely
- Allow the captive to issue policies through a licensed admitted carrier while retaining the risk (Correct answer)
- Transfer all losses to the reinsurance market
- Reduce the captive's minimum capitalization requirements
Correct answer: Allow the captive to issue policies through a licensed admitted carrier while retaining the risk
A fronting insurer issues the policy on behalf of the captive in states requiring admitted paper, while the captive assumes the risk through a reinsurance agreement.
Question 6: In construction risk financing, 'funded reserves' refer to:
- Money set aside in a restricted account to pay anticipated self-insured losses (Correct answer)
- Premium payments held by the insurer before claims are filed
- A government escrow required for public project bonds
- Reinsurance recoveries held in trust
Correct answer: Money set aside in a restricted account to pay anticipated self-insured losses
Funded reserves are liquid assets segregated to cover expected losses under a self-insurance or large-deductible program, ensuring cash is available when claims are paid.
CRIS CRIS Risk Financing & Insurance Programs 2
What is the primary purpose of a construction wrap-up insurance program?