Section 2 - Risk Financing Program Decision Making

Question 1

Total Cost of Risk (TCOR)

Answer 1

• Sum of all costs and expenses associated with risk and management of risk within an org
  ○ Insurance costs + retained losses + RM departmental costs + outside services fees + indirect costs
  
  • Internal financing less certain than external financing.

Question 2

Two Risk Financing Sources and Examples of Each

Answer 2

Internal
- Choice of Deductible
- Self Insurance

External
- Insurance
- Contractual Transfer of Financial Responsibility to 3rd Party

Question 3

1st Party Deductible vs 3rd Party

Answer 3

1st Party
- Carrier pays the insured directly and takes away the deductible.
- Example of fixing car. Carrie will pay for the amount minus deductible cus they don’t care if you get your car

3rd party
- Carrier pays the third party immediately in full and then you reimburse the carrier.

Question 4

Reasons for Uninsured Losses

Answer 4

Coverage declined by insured

Limits are exceeded by loss

Exceeds sublimits / restrictions

Unintentional gap in coverage

Question 5

9 Characterizations of Financial Risk

Answer 5

DDDCCCAPS

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 6

Degree of Loss Sensitivity

Answer 6

What degree are the organizations results impacted by losses?

• Frequency: How likely a loss will happen
• Severity: How bad will the impact of the loss be?

Question 7

Degree of Certainty - Define / How TCOR Looks for Insurance, Retained Losses, Risk Management, Outside Service Fees and Indirect Costs

Answer 7

Some organizations want certainty, clarity of decision. Certainty helps with resource planning

TCOR
§ Insurance: Relatively Certain
§ Retained Losses: Uncertain but Somewhat predictable
§ Risk Management Department: Certain
§ Outside service fees: Certain
Indirect Costs: Uncertain

Question 8

Costs / Pricing - 4 Considerations to Align with the risk appetite and financial stature

Answer 8

DOTR (Do Total Rewards)

Time: How much time and effort are required of the organization
based on the risk financing options selected?

Resources or People, Processes and Tech: How capable is an organization at responding?

Dollars: Enough money for unforeseen losses? Enough for multi deductible payments on small claims?

Opportunity: Money being spent here cannot be put to work elsewhere.

Question 9

Top Down Pricing vs Bottom Up Pricing

Answer 9

Top Down:
Manual Rating or Scheduled Rating. Can be state to state

Bottom Up: Developed by historical losses. Losses + exposures + admin costs

Question 10

Collateral Definition

Answer 10

§ Property pledged to an insurer to assure any funds advanced on behalf of the insured are repaid to the insurer secure in the vent insured defaults.

Question 11

Sources of Collateral

Answer 11

CCSLAB

Cash

Cert of deposits

LOC

Surety Bond

Accounts Receivables

Bank Trust Agreements

Question 12

3 Issues with Collateral

Answer 12

May be stacked

Costs in either fees or opportunity

Can tie up cash flow for additional funding or impede quality of surety bonds

Question 13

Cash Flow Possibility - Define

Answer 13

Provides financial flexibility

	○ Cash, timing and control opportunities go from low to high depending on the amount of risk internally financed.

Question 14

Plan Flexibility

Answer 14

Balancing the Following: Pricing, contract language, program structure

More retention = more flexibility

Question 15

Service Options Define

Answer 15

○ Degree of responsibility, control and cost containment will vary
Able to customize such as having specific claims adjustor, risk consultants,