Module 4

Question 1

Informal Retention

Answer 1

an org. pays for losses with cash flow or current assets and often keeps no record of losses

Question 2

Describe the purpose of self-insurance plan

Answer 2

enable org to lower long term cost of risk by allowing it to pay for its own losses without incurring the transaction cost associated with insurance

Question 3

Explain why high severity losses are unsuitable for self-insurance

Answer 3

typically low frequency and therefore unpredictable

Question 4

Describe the organizations and types of losses for which self-insurance is most appropriate

Answer 4

commited to risk control

able to tolerate risk retention

willing to devote capital and resources

particularly suited for financing losses that can be budgted and paid out over time

Question 5

Individual Self-insurance plan

Answer 5

A retention plan that involves only one organization

Question 6

Group self-insurance plan

Answer 6

a group of employers in the same industry that jointly and severally guarantee payment of wokers comp benefits to employees of the group’s members

Can be used only for workers comp and health benefits in US

Question 7

identify the types of individual self-insurance plans that are generally subject to state regulatory control

Answer 7

Workers comp

auto liability

general liability self insurance plans

Question 8

Distinguish between the loss exposures covered by individual self-insurance plans and those covered by group self-insurance plans

Answer 8

individual - multiple types of exposure

group - workers comp and healthcare benefits

Question 9

Describe how a group self-insruance plan operates

Answer 9

operates like an insurer - pools loss exposures of its members

plan administartor issues member agreements, collects premiums manages claims

Question 10

Third Party Administrator

Answer 10

org that provides admin services associated with risk financing and insurance

Question 11

Incurred but Not reported (IBNR) losses

Answer 11

losses that have occurred but not been reported to insurer

Question 12

List examples of activities that may be performed by a claim representative in the process of claim settlement for self-insured organization

Answer 12

investigate accident scene

verify claimants salary information

compare statement to police report

reexamines details when conflicts in information

Question 13

Identify the conditions set forth in generally accepted accounting principles (GAAP) relating when a loss reserve must be established

Answer 13

Establish loss reserve if:

1. loss occurred before the date of financial statement
2. amount that will be paid on the loss can be reasonably estimated

Question 14

Identify the activities involved in litigation management

Answer 14

evaluating and selecting defense lawyers

supervising defense lawyers during litigation

keeping records of defense lawyer costs

auditing legal bills and evaluating alternative fee-billing strategies

Question 15

Identify two approaches states use to assess self-insured organizations

Answer 15

taxes bon a percentage of losses

percentage of what would have been paid in premium

Question 16

List the major advantages of self-insured plans

Answer 16

Control over claims

loss control

long-term costs savings

cash flow benefits

Question 17

Explain how the use of a self-insured plan encourages loss control

Answer 17

because pays own losses has incentive to prevent and reduce them.

Question 18

Explain why an organizations long-run costs using self insurance tend to be lower than the cost of transfer

Answer 18

org does not have to contribute to insurers’s overhead and profits

does not have to pay insurer’s risk charge

not subject to taxes

Question 19

List the major disadvantages of self insurance

Answer 19

uncertainty of retained loss outcomes

admin requirements

deferral of tax deductions

contractual requirements