Chapter 4

Question 1

Retention

Answer 1

A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses

Question 2

Transfer

Answer 2

In the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party

Question 3

Primary layer

Answer 3

The first level of insurance coverage above any deductible

Question 4

Excess layer

Answer 4

A level of insurance coverage above the primary layer

Question 5

Excess coverage

Answer 5

Insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention

Question 6

Umbrella policy

Answer 6

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

Question 7

Buffer layer

Answer 7

A level of excess insurance coverage between a primary layer and an umbrella policy

Question 8

Self-insurance

Answer 8

A form of retention under which an organization records its losses and maintains a formal system to pay for them

Question 9

Large deductible plan

Answer 9

An insurance policy with a per occurrence or per accident deductible of $100,000 or more

Question 10

Captive insurer

Answer 10

A subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates

Question 11

Risk retention group

Answer 11

A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations

Question 12

Rent-a-captive

Answer 12

An arrangement under which an organization rents capital from a captive to which it pays premiums and receives reimbursement for its losses

Question 13

Protected cell company (PCC)

Answer 13

A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall company

Question 14

Finite risk insurance plan

Answer 14

A risk financing plan that transfers a limited (finite) amount of risk to an insurer

Question 15

Pool

Answer 15

A group of organizations that band together to insure each other’s loss exposures

Question 16

Retrospective rating plan

Answer 16

A rating plan that adjusts the insured’s premium for the current policy period based on the insured’s loss experience during the current period; paid losses or incurred losses may be used to determine loss experience

Question 17

Loss limit

Answer 17

The level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium

Question 18

Capital market

Answer 18

A financial market in which long-term securities are traded

Question 19

Securitization

Answer 19

The process of creating a marketable investment security based on a financial transaction’s expected cash flows

Question 20

Insurance securitization

Answer 20

The process of creating a marketable insurance-linked security based on the cash flows that arise from the transfer of insurable risks

Question 21

Hedging

Answer 21

A financial transaction in which one asset is held to offset the risk associated with another asset

Question 22

Derivative

Answer 22

A financial contract that derives its value from the value of another asset

Question 23

Contingent capital arrangement

Answer 23

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