Risk Financing Flashcards
Retention
A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses
Transfer
In the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party
Primary layer
The first level of insurance coverage above any deductible
Excess layer
A level of insurance coverage above the primary layer
Excess coverage
Insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention
Umbrella policy
A liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention
Buffer layer
A level of excess insurance coverage between a primary layer and an umbrella policy
Self-insurance
A form of retention under which and organization records its losses and maintains a formal system to pay for them
Large deductible plan
An insurance policy with a per occurrence or per accident deductible of $100,000 or more
Captive insurer, or captive
A subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates
Risk retention group
A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations
Rent-a-captive
An arrangement under which an organization rents capital from a captive to which it pays premiums and receives reimbursement for its losses
Protected cell company (PCC)
A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall company
Finite risk insurance plan
A risk financing plan that transfers a limited (finite) amount of risk to an insurer
Pool
A group of organizations that band together to insure each other’s loss exposures
Retrospective rating plan
Rating plan that increases or reduces an insured’s premium for a policy period based on the insured’s own losses during the same period
Loss limit
The level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium
Hold-harmless agreement (or indemnity agreement)
A contractual provision that obligates one of the parties to assume the legal liability of another party
Capital market
A financial market in which long-term securities are traded
Securitization
The process of creating a marketable investment security based on a financial transaction’s expected cash flows
Insurance securitization
The process of creating a marketable insurance-linked security based on the cash flows that arise from the transfer of insurable risks
Hedging
A financial transaction in which one asset is held to offset the risk associated with another asset
Derivative
A financial contract that derives its value from the value of another asset
Contingent capital arrangement
An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold
