Section 2 (26 pts)

Question 1

2 goals of financial management

Answer 1

• maximize profits

- reduce costs

Question 2

TCOR

Answer 2

Total Costs of Risk = insurance costs + retained losses + risk management departmental costs + outside service fees + indirect costs

Question 3

Self Insured Retention

Answer 3

dollar amount that must be paid before carrier will respond

Question 4

9 characteristics of risk financing

Answer 4

• degree of loss sensitivity
• degree of certainty
• costs/pricing
• collateral requirements
• cash flow possibility
• accounting tax impact
• plan flexibility
• service options
• degree of retention

Question 5

degree of loss sensitivity - what is it, why does it matter

Answer 5

recognition of the impact of losses (frequency and severity) on a risk financing program. must understand how losses will impact the risk financing program

Question 6

degree of certainty - what is it, why does it matter

Answer 6

accurately predicting costs associated with risk financing options to manage TCOR. internal financing becomes less certain than external financing. allows organization to effectively manage resources and financial budgets

Question 7

you have estimated your losses for the coming year at $300,000. your u/w has told you the expense ration on this line of business is 40%.

• what is the loss-indicated premium?
• if quoted premium is 600,000 should you purchase?

Answer 7

x = z / (1 - y)
x=indicated premium
y=expense ratio
z=losses
300,000 / (1 - .40) = 500,000

Question 8

collateral example

Answer 8

cash, surety bond, letter of credit, accounts receivable, cd

Question 9

is low or high retention plan needed - if insured prefers pre-bundled services

Answer 9

low

Question 10

is low or high retention plan needed - organization prefers a plan w little to no collateral requirement

Answer 10

low