RIMS Risk Financing & Transfer Strategies 2

Question 1

How does a self-insured retention (SIR) differ from a standard deductible in a commercial insurance policy?

Accepted Answer

An SIR requires the insured to defend and pay claims up to the retention before insurer involvement, while a deductible typically involves the insurer advancing defense costs

Answer

An SIR is always larger than a deductible

Answer

A deductible applies only to property losses, while an SIR applies only to liability losses

Answer

An SIR is paid after the policy limit is exhausted, while a deductible is paid first

Question 2

A fronting arrangement in captive insurance programs involves:

Accepted Answer

The captive reinsuring a commercial insurer that issues admitted policies on its behalf

Answer

The captive issuing policies directly to third-party commercial policyholders

Answer

A state guaranty fund assuming the captive's liabilities

Answer

The parent company guaranteeing the captive's reinsurance obligations

Question 3

A parametric insurance product pays a predetermined amount when:

Accepted Answer

A specified triggering event or index reaches a defined threshold, regardless of actual loss

Answer

The insured's actual documented losses exceed the policy deductible

Answer

An independent adjuster certifies that physical damage occurred

Answer

The total cost of risk exceeds the organization's budget allocation

Question 4

Catastrophe bonds (cat bonds) transfer risk to the capital markets by:

Accepted Answer

Having investors provide upfront capital that is forfeited if a defined catastrophe trigger is met

Answer

Allowing insurers to issue equity shares to policyholders after a major loss

Answer

Creating a government reinsurance backstop funded by premium taxes

Answer

Requiring reinsurers to post collateral equal to their maximum treaty obligation

Question 5

Which factor is MOST critical when an organization selects a captive domicile?

Accepted Answer

The domicile's regulatory environment, capital requirements, and tax treatment

Answer

Proximity of the domicile to the parent's corporate headquarters

Answer

The size of the domicile's domestic insurance market

Answer

Whether the domicile has a bilateral tax treaty with the U.S.

Question 6

Insurance-linked securities (ILS) are PRIMARILY used by insurers and reinsurers to:

Accepted Answer

Transfer peak catastrophe exposure to capital market investors

Answer

Raise equity capital to fund merger and acquisition activity

Answer

Comply with Solvency II reserve requirements in the European Union

Answer

Hedge interest rate risk on their fixed-income investment portfolios

Question 7

A risk purchasing group (RPG) differs from a risk retention group (RRG) primarily because an RPG:

Accepted Answer

Purchases commercial liability insurance on behalf of its members from a licensed insurer

Answer

Is owned by its members and retains the risks it insures

Answer

Is exempt from all state insurance regulations under federal law

Answer

Can write first-party property coverage as well as liability coverage