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59 Cards in this Set
- Front
- Back
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Risk financing deals with _______ of funds to pay for losses
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sources
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What are the two sources of funds to pay for losses
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Internal Funds and External Funds
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What is a risk transfer of the financing type?
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The transferring of the financial responsibilities to pay for a loss to a 3rd party. The original responsibility holder still has the exposure to loss
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An example of risk transfer of the financing type is _________
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insurance
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What is an example of risk transfer of the financing type that is not insurance
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Hold Harmless Agreement - A contractor is financially responsible for all liability losses while under construction
Lease - Tenant is financially responsible for all losses while occupying the property |
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True or False: Risk transfer of the financing type can bounce back to the original risk holder
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True
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Explain Retention
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A firm or individual engaging in retention assumes financial responsibility for losses that do occur
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What are three individual retention examples
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Not buying insurance
Being under insured Deductible Insurance |
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How many risk management strategies are used in having deductible insurance
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2
Risk transfer of the financing type Active Retention |
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What is active retention
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A known decision to retain the exposure to loss
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What is passive retention
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A case where the at risk firm or individual is unaware of the risk at hand. This situation usually results from a failure to properly identify or underestimate loss exposures
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What is funded retention
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When a firm sets aside money each "period" to pay for losses
In the event of a loss, these funds are then used to pay for losses |
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What is unfunded retention
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When losses are paid for out of current revenue or a borrowed fund
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Which loss scenario is best for unfunded retention?
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When losses are lower in severity and frequency
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Self insured retention is the same as a _________
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deductible
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What are two common examples of benefits that are self insured?
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Health Insurance Benefits
Workers Compensation |
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What is the ideal loss scenario for self insurance
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When there is a loss with high frequency and low severity
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What are the ideal characteristics for self insurance
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1. Fairly predictable losses
2. Long payout period |
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What does a long tailed loss exposure provide?
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Allows the possibility of pre-funding the "known-loss" occurring in the future
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What are the advantages of self insurance over market insurance?
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1. Potentially less expensive
2. Flexibility in the design in their "insurance programs" 3. Money can be invested internally at a higher rat of return than is credited by the insurance 4. Firms can rein the full benefits of successful loss prevention and loss reduction programs |
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What is an advantage of market insurance?
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The cost of the insurance is known, not expected
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Self insurance reduces _____ ______ associated with insurance
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Moral Hazard
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A Firm who self insures must preform many of the ______________ activities associated with insurance
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administrative
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What is an ASO Contract?
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Administrative Services Only insurance contract
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What is a capture insurer?
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A wholly owned subsidiary of a firm (not in the insurance business) whose primary purpose is to insure the risks of the parent company or companies
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What are the two types of captives
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Single parent Captives
Association Captives |
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What are association captives?
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Firms or groups that join together to form an insurance captive
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What is an example of an association captive?
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Genesis Corp - Providing medical malpractice insurance for teaching hospitals on the east coast
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What are three advantages of captives?
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1. Helps firms with hard markets
2. Location - many captives are based in Bermuda 3. Provide access to reinsurance markets |
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What is the function of a loss matrix?
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Indicates the possible expenditures associated with each combination of risk management alternatives and future states of the world
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What is a worry value?
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Cost of anxiety, The maximum amount over and above P* that a person is willing to pay to reduce uncertainty
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What is an Actuarially Fair Premium?
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A premium for insurance equal to the expected loss only (P*)
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What is Pmax?
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A maximum premium a person is willing to pay for insurance against a particular risk
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Pmax-P*=_____ _____
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Worry Value
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When will a person or firm's worry value increase?
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1. When the size of the maximum possible loss increases
2. When the probability of maximum possible losses increases 3. When the level of confidence in the estimate of P* decreases 4. When the variability in losses decreases 5. When the financial strength of a firm or individual decreases 6. When the level of insurance coverage decreases |
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What is the best risk financing option when frequency is LOW and severity is LOW
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Unfunded retention
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What is the best risk financing option when frequency is HIGH and severity is LOW
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Funded Retention
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What is the best risk financing option when frequency is LOW and severity is HIGH
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Insurance
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What is the best risk financing option when frequency is HIGH and severity is HIGH
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Avoidance
Loss Prevention and Loss Reduction |
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Adding another person to the risk pool ______ the insurer's risk even though the expected payout had _________
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lowers, increased
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As the risk pool gets larger and larger, the risk faced by the insurer _____ and eventually approaches _
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Falls, 0
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A Risk Pool ideally needs to be _____ and ___________
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Large, Homogeneous
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What is the function of insurance?
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Insurance pools exposures to loss of individuals into a group
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When an insurance agreement is made, it is referred to as a contract of _________
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indemnity
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When an insurer pays cash to the insured after a loss, they use loss settlement rules such as ______ ____ _____ and or ___________ ____
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Actual Cost Value and or Replacement Cost
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Examples of risks whose values are determined in advance of the loss are ____ _________, _____ ____ __ ___, and ___-__-_-____ _____
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Life Insurance, Cargo Lost at Sea, and One of a kind items
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What are some commodities being purchased through insurance?
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Piece of mind
Risk Transfer Security Certainty Safety Protection of Assets Enhanced Credit Worthiness |
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What is the formula for actual cash value?
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Replacement - Depreciation Based on Replacement Cost
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With regards to insurance, a loss should be __________ in nature
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fortuitous
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With regards to insurance, a loss should not be ___________ in nature
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catastrophic
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With regards to insurance, losses should be _______ and ___________
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Definite and Determinable
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What does it mean when a loss is definite?
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It is easy to verify that a loss has in fact occurred
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What does it mean when a loss is determinable?
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It is easy to verify the amount of the loss
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Why is it important for losses to be definite and determinable?
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1. to ease the prediction of p*
2. To lower the risk charge 3. to lower the price insurance 4. to keep Pmax>Pi |
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What is The Terrorism Risk Insurance Act (TRIA)? Has it been extended since 2007? Has its name changed?
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1. a temporary federal program that provides for a transparent system of shared public and private compensation for certain insured losses resulting from a certified act of terror
2. On December 26, 2007, the President signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (Pub. L. 110-160, 121 Stat. 1839) [TRIPRA]. The law extended the life of TRIP through December 31, 2014. |
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Is TRIA public or private insurance? Explain.
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1. TRIA is a system of shared public and private compensation for certain insured losses resulting from a certified act of terror.
2. The deductible as of 2007 is 20% of losses before federal aid is available |
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Before the enactment of TRIA, how did terrorism risk impede capital growth in the US?
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After 9/11 and before the enactment of TRIA, many new construction projects required some form of terrorism insurance, which was not an insurable risk private insurance agencies were willing to undertake.
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Immediately post 911, private insurers had little data concerning US terrorism attacks. How did this impact their ability to develop a premium for terrorism insurance?
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Unable to accurately model or price terrorism exposures, reinsurers largely withdrew from the market for terrorism coverage.
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What do proponents of extending the law say would be the result of ending TRIP?
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A Return to the post TRIA craze
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