Module 3

Question 1

Pool

Answer 1

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

Question 2

Risk Charge

Answer 2

An amount over and above the expected loss component of the premium to compensate the insurer for taking the risk that losses may be higher than expected

Question 3

Counterparty Risk

Answer 3

The risk that the other party to an agreement will default

Question 4

Identify the circumstances under which pooling reduces risk

Answer 4

when the pooled losses are uncorrelated/independent

not subject to common cause of loss

Question 5

Describe the effect of pooling on an org’s expected accidental losses

Answer 5

does not change accident frequency or severity

changes probability distribution of losses

Question 6

Describe the typical distribution of positively correlated losses

Answer 6

positively correlated losses have a distribution with greater variability (higher standard deviation)

average losses are more difficult to predict

Question 7

Contrast insurance and pooling

Answer 7

Insurance transfers risk to insurer in exchange for premiums

insurer has additional financial resources from which it can fund losses

Question 8

Describe the services, in addition to the risk transfer, that are often provided by insurers

Answer 8

risk control services

claim and legal services (settling claims, administering claim payments, preventing fraud; managing medical and disability claims, providing systems to report, track and pay claims, and providing legal expertise and a network of legal resources)

Question 9

List the ways insurance benefits individuals, organizations and society

Answer 9

indemnifies for covered losses

enables management of cash flow uncertainty
enables individuals to meet legal requirements

promotes risk control

frees up financial resources for other expenditures or investments

supports insured’s credit

provides source of investment funds for insurers and insureds

provides source of investment funds for insurers/insureds

helps reduce social burden

Question 10

Explain how an org can achieve risk financing goals through the use of insurance

Answer 10

indemnifies for covered losses

manages cash flow uncertainty

meets legal requirements (Statutory and contractual requirements)

Question 11

List risk-sharing mechanisims an insurer may use to promote risk control

Answer 11

Deductibles

Premium credit incentives

contractual requirements

Question 12

Why do insurers seek out losses that involve pure risk

Answer 12

no possibility of gain on part of insured.

Question 13

Why do insurers seek out losses that are accidental

Answer 13

no incentive on part of insured

Question 14

Definite and measureable: Give an example of an occurrence that could be insured

Answer 14

sudden bursting of water pipe

Question 15

Definite and measureable: Give an example of an occurrrence that could not be insured

Answer 15

slow leak in bathroom

Question 16

Deductible

Answer 16

a portion of a covered loss not paid by insurer

Question 17

Flat deductible

Answer 17

stated in a specified dollar amount

Question 18

disappearing deductible

Answer 18

decreases in amount as loss amount increases.

disappears when surpases a stated amount

Question 19

percentage deductible

Answer 19

expressed as percentage of some other amount

property value or loss amount

Question 20

Aggregate annual deductible

Answer 20

a deductible that limits the total amount of losses retained during a year

After specified dollar value insurer provides first dollar coverage on all subsequent losses.

Question 21

per claim deductible

Answer 21

a deductible that applies to all damages sustained by any one person or org as a result of one occurrence.

5 people making liability claim = 5 deductibles

Question 22

per accident or per occurrence deductible

Answer 22

applies once to all claims stemming from the occurrence

Question 23

waiting period

Answer 23

statutory time preiod in which the worker/insured must wait for in order to collect benefits

Question 24

Explain how deductibles support the economical operation of insurance

Answer 24

allows insured org to obtain the risk transfer it needs while retaining those losses it can safely absorb

Question 25

Large deductible plan

Answer 25

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

Question 26

Self-Insurance

Answer 26

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

Question 27

Residual Market Loading

Answer 27

An amount charged to make up for losses in a state sponsored plan to insure high risk exposures

Question 28

Distinguish between a large deductible plan and Self-insured retention plan

Answer 28

Large Deductible plan - insurer responsible for adjusting and paying losses SIR - insured responsible for adjusting and paying its own losses

Question 29

identify the advantages and disadvantages of large deductible plans

Answer 29

Advantages: reduce the cost of risk compared with other insurance plans - avoid premium taxes, residal market loadings, overhead/profit large deducible plan allows beneift of acces to cash flow Disadvantage: losses may be higher than expected ownering net income and cash flow

Question 30

underlying insurance

Answer 30

Insurance that applies below an excess or unbrella liability policy

Question 31

How do liability loss exposures differ from property loss exposures with regard to assessment of maximum possible loss?

Answer 31

estimating liability losses is harder. Jury dugements can be larger than predicted.

Question 32

Why is commercial liability insurance often arranged in layers?

Answer 32

Because liability limits may be higher than any one inisurer will take on.

Question 33

How do aggreage limits of liability affect a commercial entity's need for liability insurance?

Answer 33

several claims can exhaust limits, so no primary coverage

Question 34

Excess Liability policy

Answer 34

a policy that covers liability claims in excess of limits of an underlying policy or a stated retention amount

Question 35

Umbrealla liability policy

Answer 35

provides excess liability coverage above underlying policies may also include coverage not available in underlying policy

Question 36

why are excess liability policies and umbrella liability policies used?

Answer 36

insure losses too severe to be covered under primary policies

Question 37

what is the basic difference between an excess liability policy and an umbrella liability policy

Answer 37

Excess is never broader (and might be narrower) than underlying umbrella ordinarily provides broader coverage than the underlying policy, so may cover some claims not included in primary coverage

Question 38

list two reasons why the distinction between excess and umbrella coverage is often unclear

Answer 38

terms used interchangabley by courts and insurance profession excess and umbrella policies are rarely standarized

Question 39

self-contained excess liability policy

Answer 39

subject to own provisions only does not depend underlying policies for scope of coverage

Question 40

Aggregate or stop loss, excess liability insurance policy

Answer 40

requires insured to retain specified amoun tof loss from the first dollar during the specified period of time, usually one year insurer pays all loss that period that exceeds the retention up to policy limit

Question 41

Identify the three forms that an excess liability insurance policy may take

Answer 41

a following form policy subject to provisions of underlying policy a self-contained policy subject to its own provisions a combination of following/self-contained

Question 42

Under what circumstance will a following -form excess liability policy cover a claim in excess of the underlying limits/

Answer 42

only if covered by the underlying form

Question 43

Explain why coverage gaps may occur between the excess and underlying layers when a self-contained excess liability policy is used

Answer 43

because scopes of coverage between underlying and excess can occur when self-contained excess policy.

Question 44

Identify a distinguishing feature of a true umbrella policy

Answer 44

a provision stating that the policy applies overa a self-insured retention if the underlying policy does not cover a loss covered by the umbrella

Question 45

contrast a specific excess liability policy with an aggregate excess liability policy

Answer 45

Specific Excess - insured pays retention for each loss Aggregate Excess - insured pays retention on sum of all losses and insurer pays the amount over top.

Question 46

Working layers

Answer 46

The layers of coverage most often called on to pay claims.

Question 47

Buffer Layer

Answer 47

the level of excess insurance between a primary and umbrella

Question 48

Explain the difference between working layers and buffer layers of insurance

Answer 48

Primary and umbrella are working layers (most often called upon) Excess is buffer layer

Question 49

What are three problems that can occur when liability insurance is layered?

Answer 49

Application of aggregate limits may vary in each layer Excess policies may differ as to defense coverage excess layers over the first umbrella layer may purport to be following-form policies but in fact may contain restrictions not present in the umbrella layer

Question 50

How do risk managers usually deal with the fact that there is no monetary limit a jury might award

Answer 50

buy the highest limts they can obtain and hope they are adequate

Question 51

Admitted insurer

Answer 51

the insurer has a granted licence in that jurisdiction

Question 52

Non admitted insurer

Answer 52

an insurer not authorized by jurisdiction to do business in that state

Question 53

Exporters Package policy

Answer 53

Nonadmitted package policy tailored to organizations with incidental exposure in countries other than their home country

Question 54

Controlled Master Program

Answer 54

nonadmitted master policy issued in the country in which the insured is domiciled paired with locally admitted policies issued in foreign countries in which the insured operates

Question 55

Economy of Scale

Answer 55

a reduction in the average cost of a product or a process as the size of the company increases

Question 56

Describe the advantages of purchasing admitted coverage locally.

Answer 56

policy services locally. local mgmt accustomed to local practices premiums paid to admitted insurers are tax-deductible claims paid in local currency - eliminates for-ex rate risk local agents and brokers able to understand coverage nuances and provide better coverage advice complying with local laws and doing business locally helps integrate with local economy and community

Question 57

Describe who the exporter's package is intended for

Answer 57

insured without a permanent office or place of business in the foreign country where it operates

Question 58

Describe who the admitted policies of a controlled master program cover

Answer 58

foreign subsidiaries of multinational business

Question 59

identify the primary advantage of a controlled master program

Answer 59

.prevention of gaps in coverage. What local policy doesn't cover master policy does