Insurance & Risk Transfer Flashcards

Under a finite risk insurance program, the primary transfer mechanism that distinguishes it from conventional insurance is:

Answer: Limited risk transfer combined with a significant time-value-of-money component

Finite risk programs combine modest risk transfer with investment income and multi-year premium smoothing, making them more financing than pure insurance.

A captive insurer owned by a single parent company is best described as a:

Answer: Pure captive

A pure captive (single-parent captive) is wholly owned by one parent organization and insures only that parent's risks.

What is the key regulatory advantage of domiciling a captive in a jurisdiction like Vermont or Bermuda?

Answer: Favorable captive-specific legislation with streamlined licensing and lower minimum capital requirements

Captive-friendly domiciles offer purpose-built statutes with lighter capital requirements and faster regulatory approval processes.

Which alternative risk transfer (ART) mechanism links insurance payouts to a predefined index rather than the insured's actual losses?

Answer: Parametric (index-based) insurance

Parametric insurance triggers payment based on an objective index (e.g., wind speed, earthquake magnitude) rather than loss adjustment of actual damages.

In a retrospective rating plan, the 'basic premium' component is designed to cover:

Answer: The insurer's expenses and profit, regardless of loss experience

The basic premium in a retro plan covers insurer expenses and profit, ensuring the insurer is compensated even if losses are zero.

A risk manager obtains a 'wrap-up' (OCIP/CCIP) policy for a large construction project. The primary risk transfer benefit is:

Answer: Consolidating coverage for all contractors and subcontractors under one policy, eliminating gaps and disputes

Owner/contractor-controlled insurance programs (OCIP/CCIP) place all project participants under one policy, removing coverage gaps and inter-party litigation.

When an insurer uses 'subrogation' after paying a claim, the legal doctrine allows the insurer to:

Answer: Step into the insured's legal shoes and pursue recovery from the liable third party

Subrogation grants the insurer the insured's right to sue responsible third parties to recover amounts the insurer paid.