Insurance and Risk Transfer

Question 1

What is 1st party insurance?

Answer 1

Insurance company pays for losses suffered directly by the insured.

Question 2

What is 3rd party insurance?

Answer 2

Pay compensation to other parties if they have been injured or suffered loss.

Question 3

What are some alternative risk transfer methods?

Answer 3

Contractual transfer of risk
Captive insurance companies
Pooling of risks in mutual insurance companies
Derivatives
Single premium insurance bonds

Question 4

What are the 6Cs of purchasing insurance?

Answer 4

1. Cost
2. Coverage
3. Capacity
4. Capabilities
5. Claims
6. Compliance

Question 5

What are the advantages of using a captive insurance company?

Answer 5

1. Lower premiums charged.
2. Captive can gain access to reinsurance markets
3. A company will develop greater awareness of risk control.
4. Greater insurance coverage can be provided by the captive than the normal commercial market.
5. Tax benefits for parent of the captive and protection of assets from creditors.

Question 6

What are the disadvantages of using a captive insurance company?

Answer 6

1. Captive is exposed to claims that would have otherwise be paid by commercial market.
2. Parent company has to allocate capital to ensure adequate solvency of the captive.
3. Large losses incurred by captive are consolidated by the parent’s balance sheet as losses.
4. Compliance difficulties when captive writes business in nominated countries.
5. Significant admin costs of setting up and managing a captive insurance company.