CRO Insurance & Risk Transfer 3 — Questions and Answers
Question 1: Under a finite risk insurance program, the primary transfer mechanism that distinguishes it from conventional insurance is:
- Limited risk transfer combined with a significant time-value-of-money component (Correct answer)
- Transfer of all underwriting risk to the insurer
- Elimination of the insured's retention entirely
- Use of catastrophe bonds instead of premiums
Correct 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.
Question 2: A captive insurer owned by a single parent company is best described as a:
- Pure captive (Correct answer)
- Association captive
- Rent-a-captive
- Group captive
Correct answer: Pure captive
A pure captive (single-parent captive) is wholly owned by one parent organization and insures only that parent's risks.
Question 3: What is the key regulatory advantage of domiciling a captive in a jurisdiction like Vermont or Bermuda?
- Favorable captive-specific legislation with streamlined licensing and lower minimum capital requirements (Correct answer)
- Exemption from all U.S. federal tax obligations
- Elimination of claims-paying requirements
- Ability to write unlimited third-party business without additional licensing
Correct 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.
Question 4: Which alternative risk transfer (ART) mechanism links insurance payouts to a predefined index rather than the insured's actual losses?
- Parametric (index-based) insurance (Correct answer)
- Finite risk insurance
- Captive insurance
- Retrospective rating plan
Correct 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.
Question 5: In a retrospective rating plan, the 'basic premium' component is designed to cover:
- The insurer's expenses and profit, regardless of loss experience (Correct answer)
- Only the first layer of losses below the basic limit
- Investment income earned on reserves
- Excess losses above the maximum premium
Correct 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.
Question 6: A risk manager obtains a 'wrap-up' (OCIP/CCIP) policy for a large construction project. The primary risk transfer benefit is:
- Consolidating coverage for all contractors and subcontractors under one policy, eliminating gaps and disputes (Correct answer)
- Transferring all workers' compensation exposure to individual subcontractors
- Eliminating the need for contractual liability endorsements
- Providing first-party property coverage for the completed structure only
Correct 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.
Question 7: When an insurer uses 'subrogation' after paying a claim, the legal doctrine allows the insurer to:
- Step into the insured's legal shoes and pursue recovery from the liable third party (Correct answer)
- Cancel the policy after paying the first major loss
- Reduce future premiums to reflect the recovery received
- Share the recovered funds equally with the insured
Correct 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.
CRO Insurance & Risk Transfer 3
Under a finite risk insurance program, the primary transfer mechanism that distinguishes it from conventional insurance is: