Module 3 Flashcards
Pool
A group of orgs that band together to insure each other’s loss exposures
Risk Charge
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
Counterparty Risk
The risk that the other party to an agreement will default
Identify the circumstances under which pooling reduces risk
when the pooled losses are uncorrelated/independent
not subject to common cause of loss
Describe the effect of pooling on an org’s expected accidental losses
does not change accident frequency or severity
changes probability distribution of losses
Describe the typical distribution of positively correlated losses
positively correlated losses have a distribution with greater variability (higher standard deviation)
average losses are more difficult to predict
Contrast insurance and pooling
Insurance transfers risk to insurer in exchange for premiums
insurer has additional financial resources from which it can fund losses
Describe the services, in addition to the risk transfer, that are often provided by insurers
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)
List the ways insurance benefits individuals, organizations and society
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
Explain how an org can achieve risk financing goals through the use of insurance
indemnifies for covered losses
manages cash flow uncertainty
meets legal requirements (Statutory and contractual requirements)
List risk-sharing mechanisims an insurer may use to promote risk control
Deductibles
Premium credit incentives
contractual requirements
Why do insurers seek out losses that involve pure risk
no possibility of gain on part of insured.
Why do insurers seek out losses that are accidental
no incentive on part of insured
Definite and measureable: Give an example of an occurrence that could be insured
sudden bursting of water pipe
Definite and measureable: Give an example of an occurrrence that could not be insured
slow leak in bathroom
Deductible
a portion of a covered loss not paid by insurer
Flat deductible
stated in a specified dollar amount
disappearing deductible
decreases in amount as loss amount increases.
disappears when surpases a stated amount
percentage deductible
expressed as percentage of some other amount
property value or loss amount
Aggregate annual deductible
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.
per claim deductible
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
per accident or per occurrence deductible
applies once to all claims stemming from the occurrence
waiting period
statutory time preiod in which the worker/insured must wait for in order to collect benefits
Explain how deductibles support the economical operation of insurance
allows insured org to obtain the risk transfer it needs while retaining those losses it can safely absorb
Large deductible plan
An insurance policy with a deductible of $100,000 or more
Self-Insurance
a form of retention under which an organization records its losses and maintains a formal system to pay for them
Residual Market Loading
An amount charged to make up for losses in a state sponsored plan to insure high risk exposures
Distinguish between a large deductible plan and Self-insured retention plan
Large Deductible plan - insurer responsible for adjusting and paying losses
SIR - insured responsible for adjusting and paying its own losses
identify the advantages and disadvantages of large deductible plans
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
underlying insurance
Insurance that applies below an excess or unbrella liability policy
How do liability loss exposures differ from property loss exposures with regard to assessment of maximum possible loss?
estimating liability losses is harder. Jury dugements can be larger than predicted.
Why is commercial liability insurance often arranged in layers?
Because liability limits may be higher than any one inisurer will take on.
How do aggreage limits of liability affect a commercial entity’s need for liability insurance?
several claims can exhaust limits, so no primary coverage
Excess Liability policy
a policy that covers liability claims in excess of limits of an underlying policy or a stated retention amount
Umbrealla liability policy
provides excess liability coverage above underlying policies
may also include coverage not available in underlying policy
why are excess liability policies and umbrella liability policies used?
insure losses too severe to be covered under primary policies
what is the basic difference between an excess liability policy and an umbrella liability policy
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
list two reasons why the distinction between excess and umbrella coverage is often unclear
terms used interchangabley by courts and insurance profession
excess and umbrella policies are rarely standarized
self-contained excess liability policy
subject to own provisions only
does not depend underlying policies for scope of coverage
Aggregate or stop loss, excess liability insurance policy
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
Identify the three forms that an excess liability insurance policy may take
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
Under what circumstance will a following -form excess liability policy cover a claim in excess of the underlying limits/
only if covered by the underlying form
Explain why coverage gaps may occur between the excess and underlying layers when a self-contained excess liability policy is used
because scopes of coverage between underlying and excess can occur when self-contained excess policy.
Identify a distinguishing feature of a true umbrella policy
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
contrast a specific excess liability policy with an aggregate excess liability policy
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.
Working layers
The layers of coverage most often called on to pay claims.
Buffer Layer
the level of excess insurance between a primary and umbrella
Explain the difference between working layers and buffer layers of insurance
Primary and umbrella are working layers (most often called upon)
Excess is buffer layer
What are three problems that can occur when liability insurance is layered?
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
How do risk managers usually deal with the fact that there is no monetary limit a jury might award
buy the highest limts they can obtain and hope they are adequate
Admitted insurer
the insurer has a granted licence in that jurisdiction
Non admitted insurer
an insurer not authorized by jurisdiction to do business in that state
Exporters Package policy
Nonadmitted package policy tailored to organizations with incidental exposure in countries other than their home country
Controlled Master Program
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
Economy of Scale
a reduction in the average cost of a product or a process as the size of the company increases
Describe the advantages of purchasing admitted coverage locally.
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
Describe who the exporter’s package is intended for
insured without a permanent office or place of business in the foreign country where it operates
Describe who the admitted policies of a controlled master program cover
foreign subsidiaries of multinational business
identify the primary advantage of a controlled master program
.prevention of gaps in coverage.
What local policy doesn’t cover master policy does
