Term
| What expenses constitute an organization's Cost of Risk regardless of whether loss are retained or transferred? |
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Definition
| Administrative, Risk Control, Risk Financing, and Managing. |
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Term
| What does Administrative Expenses include when managing the Cost of Risk? |
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Definition
| The cost of internal administration and the cost of purchased services, such as claim administration or risk management consulting. |
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Term
| What are Risk Control expenses when Managing the Cost of Risk? |
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Definition
| They are incurred to reduce loss frequency and severity of losses, or increase the predictability of future losses. |
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Term
| What are Risk Financing expenses when managing the Cost of Risk? |
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Definition
| They are incurred to manage the risk financing measures used to meet the risk financing goals. (Example, commission and banking fees.) |
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Term
| Identify the factors that affect an organization's maximum cash flow variability level? |
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Definition
| Organization's size , financial strength, management's degree of risk tolerance, organization's degree in which stakeholders will accept the risk. |
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Term
| Describe the internal methods an organization might use to increase cash liquidity? |
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Definition
| Selling assets or retaining cash flow. |
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Term
| Describe external methods an organization might use to increase cash liquidity? |
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Definition
| Borrowing, issuing a debt instrument (bond) or issuing stock. |
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Term
| What is the Risk Financing Technique Retention? |
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Definition
| A technique by which losses are retained by generating funds within the organization to pay for the losses. |
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Term
| What is the Risk Financing Technique Transfer? |
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Definition
| A risk financing technique by which the financial responsibility fo rlosses and variability of cash flows are shifted to another party. |
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Term
| Name the four planned retention funding techniques available to an organization. |
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Definition
| Current expenses of losses (relies on current cash flow); Using an unfunded reserve (relies on an accounting entry that does not specificy the assets that are to pay); Using a funded reserve (relies on a reserve that is supported with allocated cash, securities, or other liquid assets); Borrowing funds (uses an organization's own resources to pay for losses and in time uses it own earnings to repay the loan). |
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Term
| What is Guaranteed Cost Insurance? |
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Definition
| Insurance policies that are designed to cover property, liability, and net income exposures from various causes. The insured transfers the potential financial consequences of certain loss exposures to the insurer for a premium. In exchange, the insurer agrees to pay for all losses covered by the policy, subject to a deductible and policy limit, and agrees to provide necessary claim and litigation services. |
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Term
| Define Primary Layer (Guaranteed Cost Insurance ). |
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Definition
| The first level of insurance coverage above any deductible. |
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Term
| Define Excess Layer (Guaranteed Cost Insurance). |
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Definition
| A level of insurance coverage above the primary layer. |
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Term
| Define Excess Coverage (Guaranteed Cost Insurance). |
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Definition
| Insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention. |
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Term
| Define Umbrella Policy (Guaranteed Cost Insurance) |
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Definition
| A liability policy that provides excess coverage above underlying policies, and may also provide coverage not available in the underlying policies, subject to a self-insured retention. |
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Term
| Define Buffer Layer (Guaranteed Cost Insurance). |
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Definition
| A level of excess insurance coverage between a primary layer and an umbrella policy. |
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Term
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Definition
| A form of rention under which an organization records its losses and maintains a formal system to pay for them. The organization is responsible for recordkeeping, claims adjustment, loss reserving, litigation management, regulatory requirements, and may be required to purchase excess insurance above the planned retention. |
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Term
| What is a Large Deductible Plan? |
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Definition
| A plan with a deductible (at least $100,000) that allows the insured to self-insure most of its claims without establishing a qualifying self-insurance plan. The insurer provides administrative and claim services and the insured reimburses the insurer for any losses under the deductible. |
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Term
| What is a Captive Insurer or Captive? |
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Definition
| A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates. |
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Term
| What is a Risk Retention Group (RRG)? |
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Definition
| A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizatons. |
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Term
| What is a Rent-A-Captive? |
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Definition
An arrangement under which an organization rents capital from a captive to which it pays premiums and receives reimbursements for its losses.
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Term
| What is a Protected Cell Company (PCC)? |
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Definition
| A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall comapny. |
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Term
| What is a Finite Risk Insurance Plan? |
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Definition
| A risk financing plan that transfers a limited (finite) amount of risk to an insurer. It is often used for especially hazardous loss exposures for which insurance capacity is limited or unavaialble (such as environmental liability and earthquake damage). The premium is a very high percentage of the policy limits. |
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Term
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Definition
| A group of organizatons that band together to insure each other loss exposures. |
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Term
| What is Retrospective Rating Plan? |
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Definition
| A Risk Financing plan that increases or reduces an insured's premium during a policy period based on the insured's own losses during the same period. They are used to finance low to medium severity losses and are usually combined with other risk financing plans to cover high severity losses. The insured must have a substantial insurance premium to benefit from this plan and cash flow uncertainty can remain. |
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Term
| Define Loss Limit under a Retrospective Rating Plan? |
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Definition
| A level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium. |
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Term
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Definition
| A financial market in which long-term securities are traded. |
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Term
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Definition
| The process for creating a marketable investment security based on a financial transaction's expected cash flow. |
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Term
| What is Insurance Securitization? |
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Definition
| The process of creating a marketable insurance-linked security based on the cash flows that arise from the transfer of insurable risks. Example: The insurer sells insurance policies that cover losses related to natural disaster. They transfer that risk to capital markets where investors holding diversified portfolios have a larger pool of assets to absorb catastophic losses. It reduces the insurer's overall risk. |
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Term
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Definition
| A financial transaction in which one asset is held to offset the risk associated with another asset. It is well suited to business risks created by price changes. Example: oil prices are volatile. A business can enter into a contract to buy oil at a certain price and time at some pont in the future. It is a speculative business risk that allow organizations to protect itself agains possible price-level losses by sacrificing possible price-level gains. |
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Term
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Definition
| A financial contract that derives its value from the value of another asset. |
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Term
| What is a Contingent Capital Arrangement? |
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Definition
| An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold. An organization does not transfer its risk of loss to investors. It receives captial injection in the form os debt or equity after the a loss occurs to help it pay for the loss. |
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