RIsk Topic 5

Question 1

What type of captive is owned by Temple?

Answer 1

Group Captive

Question 2

What is one distinct advantage a group captive has vs a single parent captive?

Answer 2

Income tax break of writing off premium paid to captive

Question 3

What is the main reason captives exist?

Answer 3

To save money on the premium

Question 4

What is the difference between funded and unfunded retention?

Answer 4

Funded you save money to pay for future losses – unfunded you pay as you go

Question 5

What are the two ideal characteristics for self-insurance?

Answer 5

a. Losses that are predictable
b. Losses that have a long payout window

Question 6

What are the three types of risk financing?

Answer 6

1) Use external funds called transfers
2) Use internal funds called retention
3) Borrow money, issue debt

Question 7

How does retention work?

Answer 7

A firm or individual assumes the financial responsibility for the losses that occur

Question 8

What are two examples of retention?

Answer 8

1) Not buying insurance
2) Insurance without a deductible

Question 9

What is funded retention?

Answer 9

A firm sets aside funds every period to pay for losses

Question 10

What type of losses is funded retention ideal for?

Answer 10

Losses that are predictable in nature and high in severity

Question 11

What is unfunded retention?

Answer 11

No separate fund to pay for losses
- Company pays for losses as they occur (from your money or money you borrow from someone else)

Question 12

What type of losses is unfunded retention ideal for?

Answer 12

Losses that are low frequency and low in severity
Ex) Losing a pen

Question 13

What is active retention?

Answer 13

Deliberate decision to practice retention

Question 14

What is passive retention?

Answer 14

Retaining the exposure to loss, but you may be unaware

Question 15

What type of retention is self-insurance?

Answer 15

Active and funded retention

Question 16

What type of loss exposures is self-insurance for?

Answer 16

Significant loss exposures where many units exist

Question 17

What are the main advantages of self-insurance?

Answer 17

1) It’s flexible
2) No loading
3) Time value of money

Question 18

What are the main disadvantages to self-insurance?

Answer 18

1) Catastrophic loss possibility
2) One large loss could wipe you out
3) Can be a PR nightmare
4) The firm may have to perform admin functions
5) Hard to return to the insurance market once you have left

Question 19

What are the solutions to the catastrophic loss possibility?

Answer 19

• Stop loss insurance
• Insurance contract with a very large deductible
• Stop loss: So self insuring is still cheaper for larger organizations

Question 20

How can a firm solve the problem of having to perform admin functions when self-insuring?

Answer 20

• ASO (Administrative services only) contract with insurer
• Can hire a TPA (Third party administration) to handle those functions

Question 21

What are the negative PR implications associated with self-insurance?

Answer 21

• Could give the impression that the company is financially unstable
• Can’t pass the blame to the insurer when denying claims

Question 22

Why is it hard to return to the insurance market once you have decided to self-insure?

Answer 22

You are considered more of an insurance risk

Question 23

What does the tax code bias in terms of insurance?

Answer 23

The tax code biases buying insurance over self-funding

Question 24

How is the income tax treatment for a company that self-insures?

Answer 24

• Losses and administrative expenses are tax deductible (only when paid)
• All other things equal

Question 25

What is a captive insurer?

Answer 25

• A wholly-owned subsidiary of the company (the parent is not in the insurance business)
• The primary business purpose is to ensure the risks or the parent or parents
• Parents provide the money to start the captive - they fund it at the beginning

Question 26

What are the two types of captives?

Answer 26

1) Single parent captive
2) Association/group captive with more than one parent

Question 27

What are the advantages of a captive insurer?

Answer 27

• Helps during “hard” markets
• Often located outside of the United States for regulatory freedom
• Bermuda and the Cayman Islands are two of the most popular locations

Question 28

What benefit do group captives get that single-parent captives do not?

Answer 28

They can write off the premium if the parent risk does not make up more than 30% of the risk portfolio

Question 29

What are some other reasons for being a group captive?

Answer 29

• Freedom to cover or do whatever you want
• Complete freedom if single parent
• Limited freedom if in a group

Question 30

What is a non-insurance risk transfer of the financing type?

Answer 30

• Transfer of risk from one party to another party other than an insurance company
• Leases
• Tenant is responsible for all property losses while occupying the property
• Hold harmless agreement
• Someone contractually accepts risk for you
  Ex) Contractor doing a project for you

Question 31

What are the different parts of a premium?

Answer 31

Premium = Pure premium + Risk Charge + Loading (Admin)

Question 32

What is an example of a long payout period?

Answer 32

Workers comp

Question 33

What’s an example of something predictable that would be ideal for self-insurance?

Answer 33

Medical plan for family