Assignment 2: Role of Insurance in RIsk Treatment

Insurance is the best technique for what?

financing losses with high severity and low frequency

What is insurance?

enables an organization to transfer some of its loss exposures to an insurer through a legal contract

What does insurer agree to in policy?

agrees to pay for all losses that are covered by the policy, subject usually to a deductible and one or more limits of insurance.

pay for certain services, such as investigating claims and defending the insured against liability claims

What does insured agree to in policy?

pay a sum, called the policy premium, that’s ordinarily much smaller than the policy limit(s)

insurers are willing to insure a loss exposure that has all or most of these characteristics:

It’s associated with pure risk

It’s accidental from the insured’s standpoint

It’s definite and measurable

It’s one of a large number of similar exposure units

It’s not catastrophic

It’s economically feasible to insure

What are pros of guaranteed cost?

paying for losses, maintaining liquidity, managing uncertainty, and complying with legal and regulatory requirements.

organization can generally deduct insurance premiums for income tax purposes.

What are cons of guaranteed cost?

less effective than retention in minimizing the cost of risk, which helps to explain why retention, along with insurance, is a key component of most risk financing plans.

What is a large deductible plan?

insurance policy with a significant per occurrence or per accident deductible, such as $100,000 or more

allow an organization to pay a reduced insurance premium for retaining losses below the deductible level.

What is difference of self insured retention and large deductible plan?

Large deductibles and SIRs both require insureds to retain covered losses up to a specified amount

With large deductibles, the insurer adjusts and pays the entire loss and then bills the insured for the deductible amount. With SIRs, the insured is responsible for adjusting and paying its own losses up to the SIR amount.

How does large deductible plan work?

As losses occur, the insurer settles each claim and then periodically bills the insured organization for the amount of the loss (and possibly also the claims handling expense) up to the deductible.

In this way, the organization benefits from deferring cash outflows for its retained losses compared with paying a premium up front

What is an aggregate deductible?

caps total deductible payments over a period of time

What are benefits of large deductible plan?

• States impose various charges, such as premium taxes and residual market loadings.

• An insurance premium includes charges for the insurer’s overhead costs and profit.

significantly reduce the cost of risk compared with other insurance plans by helping organizations avoid substantial premium taxes, residual market loadings, and insurer overhead and profit charges.

allow insured organizations to benefit from the cash flow available on their reserves (funds set aside) for retained losses.

What is residual market loading?

an amount charged to make up for losses in a state-sponsored plan to insure high-risk exposures, such as an assigned risk plan for auto insurance.

calculated based on a percentage of premium.

What are excess liability policies?

A policy that covers liability claims in excess of the limits of an underlying policy or a stated retention amount.

What are types of excess liability policies?

following form excess liability policies, self-contained excess liability policies, and umbrella liability policies

specific excess and aggregate excess

What is layering?

Successive levels (or layers) of coverage using an excess of loss strategy in which each layer is in excess of the lower limits provided by another insurer, resulting in a structured program of high limits of coverage.

What are working layers?

The layers of coverage in an organization’s insurance program that are most often called on to pay claims.

What is following form excess layer?

An excess liability policy that covers a claim in excess of the underlying limits only if the loss is covered by the underlying insurance.

What is self-contained excess liability policy?

An excess liability policy that is subject to its own provisions only and does not depend on the provisions of the underlying policies for determining the scope of its coverage.

What is umbrella liability 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.

What is self insured retention?

An amount that is deducted from claims that are payable under an umbrella liability policy and that are not covered at all by any primary policy.

WHat is drop down coverage?

Coverage provided by many umbrella liability policies for (1) claims not covered at all by the underlying policies and (2) claims that are not covered by an underlying policy only because the underlying policy’s aggregate limits have been depleted.

What is specific excess liability policy?

An excess liability policy that requires the insured to retain a stipulated amount of liability loss from the first dollar for all losses resulting from each single occurrence or accident.

What is aggregate excess liability policy?

requires the insured to retain a specified amount of loss from the first dollar during a specified period of time, usually one year; the insurer then pays all loss for that period that exceeds the retention, up to the policy limit.

What must be decided when structuring international policy?

insured’s risk management professional must decide whether to buy admitted insurance (for a decentralized structure) or nonadmitted insurance (for a centralized structure).

What is controlled master program?

collection of admitted and nonadmitted insurance

What is admitted insurance?

Insurance provided in a jurisdiction by an insurer that is licensed to do business in that jurisdiction.

What are advantages of Purchasing admitted coverage locally?

• The policy will be serviced locally, increasing the likelihood that service will be aligned with local practices.

• Premiums and claims will be paid in the local currency, eliminating foreign exchange rate risks for all but imported equipment or materials.

• Local agents and brokers may be able to understand local coverage nuances and advise coverage better.

• Complying with local laws and doing business locally helps integrate the company into the local economy and community.

What are disadvantages of Purchasing admitted coverage locally?

• The risk manager for a multinational company may have difficulty interpreting a policy written in a foreign language. This could lead to multiple problems, such as nonuniform conditions, coverage gaps, and underinsurance.

• If competition among insurers locally is not robust, the local policy may be more expensive. And assessing the financial strength of the local insurer can be more difficult.

• Effective solvency regulation, financial statements, and rating agencies of insurers may be lacking locally.

• Purchasing locally also lessens a company’s purchasing power and decentralizes risk management strategy, which can weaken the implementation of an enterprise risk management program.

What is nonadmitted insurance?

Insurance provided in a jurisdiction by an insurer that is not licensed to do business within that jurisdiction.

What is advantage of nonadmitted?

• Administrative control can be centralized, which can be more efficient.

• The financial strength of the insurer is more easily determined.

• The policy is written in the language of the country where the parent company is domiciled, making it easier for the parent company to understand and administer.

• The premium and claim payments will be made in the domestic country’s currency, thereby eliminating foreign exchange rate risk if only a single currency is used.

What is disadvantage of purchasing nonadmitted?

• Claims adjusting can be substantially more complicated without local coverage and local insurer representatives, especially for liability claims.

• Local management may not have confidence in the nonadmitted coverage provided by the parent company’s insurer and may decide to buy its own coverage locally.

What is exporters package policy?

Nonadmitted package policy tailored to organizations with incidental exposures in countries other than their home country.

typically issued by insurers that are domiciled in the parent company’s home country, so these policies are nonadmitted insurance in other countries

What is primary insurer?

In reinsurance, the insurer (also referred to as the ceding company) that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement.

What is large-line capacity?

A primary insurer's ability to provide a large amount of insurance under a single policy

What is professional reinsurer?

An insurer whose primary business purpose is serving other insurers' reinsurance needs.

What is reinsurance intermediaries?

An intermediary that works with primary insurers to develop reinsurance programs and that negotiates contracts of reinsurance between the primary insurer and reinsurer, receiving commission for placement and other services rendered

What is reinsurance agreement?

Contract between the primary insurer and reinsurer that stipulates the form of reinsurance and the type of accounts to be reinsured.

What is retention?

What is ceding commission?

What is retrocession?

What is capacity ratio?

What is policyholders’ surplus?

What is surplus relief?

A replenishment of policyholders’ surplus provided by the ceding commission paid to the primary insurer by the reinsurer.

What is portfolio reinsurance?

Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies.

What is treaty reinsurance?

uses one agreement, typically called a treaty, for an entire class or portfolio of loss exposures.

What is facultative reinsurance?

uses a separate reinsurance agreement for each loss exposure ceded to the reinsurer

What is facultative certificate of reinsurance?

An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure.

What is pro rata reinsurance?

A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses).

What is loss adjustment expense?

The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.

What is profit sharing commission?

A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures.

What is quota share reinsurance?

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

What is surplus share reinsurance?

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated monetary amount, or line.

What is excess of loss reinsurance?

A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified monetary amount.

nonproportional reinsurance

reinsurer responds only to losses that exceed the primary insurer’s retention

What is attachment point?

The monetary amount above which the reinsurer responds to losses.

What is working cover?

An excess of loss reinsurance agreement with a low attachment point.

What is Per risk excess of loss reinsurance?

A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk.

What is Catastrophe excess of loss reinsurance?

A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.

What is Per policy excess of loss reinsurance?

A type of excess of loss reinsurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy.

What is Per occurrence excess of loss reinsurance?

A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies.

What is Aggregate excess of loss reinsurance?

A type of excess of loss reinsurance that covers aggregated losses that exceed the attachment point, stated as a monetary amount of loss or as a loss ratio, and that occur over a specified period, usually one year.