chapter 6 Flashcards
risk transfer of a financing type
seek external sources to finance loss
you own the asset but transfer the financial responsibility
insurance
Transferring the financial responsibility of the loss to the insurer but not the asset
lease
Tennent is responsible for all property losses while living there
hold harmless agreement
when someone accepts risk for you through a contract
ex: vendor completing a task or a contractor doing a project
retention
a firm is engaging in retention assumes the financial responsibility and they don’t buy insurance
funded retention
where a firm sets aside funds periodically to pay for potential losses
good for losses that are predictable and high in severity
unfunded retention
don’t put money aside
pay for losses as they occur
better for losses that have low frequency and severity ex: losing a pen
active retention
the deliberate decision to practice retention
you know you will experience a loss and dont choose to cover the loss
passive retention
you may be unaware that you could experience a loss
planned active and funded retention
also known as self insurance
formal strategic program
done for significant loss exposures
self insurance ideal characteristics
risks that are fairly predictable
long payout period
advantages to self insurance - flexibility
can avoid state mandated benefit laws
you can pick coverages so you wont have a standard insurance contract
advantages to self insurance- no loading
basically no admin cost , no marketing expense added and no taxed added to the premium
advantages to self insurance- time value of money
any money you dont spend on a loss goes back directly to your pocket
disadvantages to self insurance
one large loss can wipe you out
you have to preform the admin functions
pr nightmare - cant pass the blame for denying claims
cant return back to insurance market after you leave
cant hold money in reserve- no write off future claims for income tax treatment
aso or tpa
aso - admin service only you can hire to do the admin work
tpa- third party admin hire to do admin work
history of captives
during the hard markets - hard to purchase insurance bc of high cost like for terrorism insurance after 9/11
captives were created to handle hard markets
captive insurer
you own the insurance company and are the customer
parent company provides capital to start captive
2 categories of captives
single parent
group captive- universities example
captive insurer advantage
located outside of us for regulatory freedom
bermuda or cayman island
save money on premium due to hard market costs
can write off for taxes if group captive as long as no member hold 30% of the portfolio
