Risk Financing & Transfer Strategies Flashcards

The 'total cost of risk' (TCOR) metric includes all of the following components EXCEPT:

Answer: Revenue earned from the organization's core business operations

TCOR aggregates premiums, retained losses, administrative costs, and indirect costs of losses — it does not include operating revenues unrelated to risk management.

Aggregate stop-loss coverage is designed to protect an organization against:

Answer: Total losses across all occurrences exceeding a specified annual aggregate threshold

Aggregate stop-loss limits the insured's total annual retained losses by capping cumulative loss exposure once it surpasses the agreed aggregate deductible.

In the context of risk financing, a 'paid-loss' retrospective program differs from an 'incurred-loss' retrospective program in that:

Answer: Premium adjustments under a paid-loss program are based on losses actually paid rather than reserves plus payments

In a paid-loss retro, premium adjustments track cash payments made on claims, so the insured retains investment income on reserves until funds are actually disbursed.

Which alternative risk transfer (ART) mechanism allows a group of unrelated companies to pool similar risks into a single underwriting vehicle without forming a licensed insurer?

Answer: Group captive

A group (or association) captive allows multiple unrelated companies with similar risk profiles to share ownership of a captive insurer and pool their losses.

A rent-a-captive arrangement is BEST suited for an organization that:

Answer: Wants captive benefits such as underwriting profit access without the capital commitment of ownership

A rent-a-captive lets an insured access a pre-established captive structure, receiving underwriting profit and investment income participation without forming or capitalizing its own entity.

Which of the following BEST describes a multi-year, multi-line (MYML) insurance program in risk financing?

Answer: An integrated policy covering multiple lines of coverage over multiple years within a single aggregate limit

MYML programs combine multiple lines (e.g., property, liability, workers' comp) and multiple policy years under one aggregate limit, providing diversification and premium smoothing.

When evaluating the feasibility of a captive insurance program, which financial metric is MOST important for determining whether the captive will be economically viable?

Answer: The anticipated spread between premiums charged and expected losses plus expenses

Economic viability depends on whether the captive can charge adequate premiums that exceed projected losses and operating expenses, generating an underwriting profit for the parent.