Insurance & Risk Transfer Flashcards

Which of the following is the most critical factor a CRO must evaluate when assessing the financial strength of a commercial insurer?

Answer: AM Best or S&P financial strength rating and surplus adequacy

Financial strength ratings from agencies like AM Best assess an insurer's ability to pay claims, which is paramount for counterparty risk management.

A 'cut-through endorsement' in a reinsurance context primarily benefits the:

Answer: Original insured, by allowing direct recovery from the reinsurer if the primary insurer becomes insolvent

A cut-through endorsement gives the original insured the right to claim directly against the reinsurer, protecting against primary insurer insolvency.

An organization self-insures workers' compensation and purchases a 'specific stop-loss' policy with a $250K per-claim retention. A single claim reaches $800K. How much does stop-loss pay?

Answer: $550,000

Specific stop-loss pays the amount above the per-claim retention: $800K - $250K = $550,000.

In insurance contract law, the 'reasonable expectations doctrine' holds that:

Answer: Courts may interpret ambiguous policy terms in favor of the objectively reasonable expectations of the insured

The reasonable expectations doctrine resolves ambiguity by honoring what an ordinary insured would reasonably expect coverage to include.

Which factor most directly causes 'adverse selection' to increase insurance costs in a risk pool?

Answer: Higher-risk individuals disproportionately purchasing coverage while lower-risk individuals opt out

Adverse selection occurs when the insured population skews toward higher-risk individuals, raising average claim costs and ultimately premiums for all participants.

A 'contractual liability' endorsement on a CGL policy is important for a CRO because it:

Answer: Extends coverage to liability the insured has assumed in a contract, such as a hold-harmless agreement

CGL contractual liability coverage picks up indemnification obligations the insured voluntarily assumed in written contracts, like vendor or lease agreements.

When evaluating total cost of risk (TCOR), a CRO should include which of the following components beyond insurance premiums?

Answer: Retained losses, risk management administrative costs, and indirect costs of risk

TCOR encompasses premiums, retained/self-insured losses, risk management administration costs, and indirect costs such as productivity loss and reputational damage.