GAC Risk Assessment & Underwriting 2 — Questions and Answers
Question 1: Under GASB Statement No. 10, a public entity risk pool must recognize a liability for claims when which condition is met?
- The pool has collected sufficient premiums to cover expected losses
- It is probable that a liability has been incurred and the amount can be reasonably estimated (Correct answer)
- A formal claim has been filed and accepted by the pool administrator
- The fiscal year in which the loss occurred has been closed
Correct answer: It is probable that a liability has been incurred and the amount can be reasonably estimated
GASB 10 requires recognition of a claims liability when it is probable that a liability has been incurred and the amount can be reasonably estimated.
Question 2: Which risk financing technique involves a government setting aside funds internally to pay for future losses without transferring risk to an insurer?
- Reinsurance
- Captive insurance
- Self-insurance reserve (Correct answer)
- Retrospective rating plan
Correct answer: Self-insurance reserve
A self-insurance reserve is an internal fund accumulation used to pay losses without transferring risk to an outside insurer.
Question 3: In underwriting governmental property coverage, which factor most directly affects the replacement cost valuation of public buildings?
- The original purchase price adjusted for inflation
- Current construction costs per square foot for comparable structures (Correct answer)
- The assessed value used for property tax purposes
- The depreciated book value recorded in the capital asset schedule
Correct answer: Current construction costs per square foot for comparable structures
Replacement cost valuation uses current construction costs to rebuild a comparable structure, not historical cost or tax-assessed value.
Question 4: A government entity's actuarial loss development triangle is primarily used to:
- Project future premium revenue from member contributions
- Estimate ultimate claim costs by observing how losses mature over time (Correct answer)
- Calculate the present value of pension obligations
- Determine the administrative expense loading in premium rates
Correct answer: Estimate ultimate claim costs by observing how losses mature over time
Loss development triangles track how reported claims grow toward their ultimate settled values, enabling actuaries to estimate total liability.
Question 5: When a public entity risk pool purchases excess-of-loss reinsurance, the attachment point represents:
- The maximum liability the reinsurer will pay per occurrence
- The dollar threshold above which the reinsurer begins paying losses (Correct answer)
- The minimum premium required to activate the reinsurance treaty
- The aggregate annual cap on pool member assessments
Correct answer: The dollar threshold above which the reinsurer begins paying losses
The attachment point is the retained loss level at which reinsurance coverage begins to respond to claims.
Question 6: Which GASB standard specifically addresses the financial reporting requirements for public entity risk pools?
- GASB Statement No. 31
- GASB Statement No. 10 (Correct answer)
- GASB Statement No. 54
- GASB Statement No. 72
Correct answer: GASB Statement No. 10
GASB Statement No. 10 establishes accounting and financial reporting standards for risk financing activities and public entity risk pools.
Question 7: In governmental risk management, a 'corridor' self-insurance program typically means the entity:
- Purchases first-dollar coverage with a high per-occurrence limit
- Retains losses within a lower and upper deductible band before coverage applies (Correct answer)
- Participates in a shared risk pool with unlimited joint liability
- Uses a captive insurer domiciled in a tax-haven jurisdiction
Correct answer: Retains losses within a lower and upper deductible band before coverage applies
A corridor self-insurance program means the entity retains losses between a lower retention and an upper excess layer, with coverage outside that band.
GAC Risk Assessment & Underwriting 2
Under GASB Statement No. 10, a public entity risk pool must recognize a liability for claims when which condition is met?