Topic 5 - Managing Enterprise risk: Risk Financing

risk financing seeks out funds to pay for fill in the blank

losses

use external funds called fill in the blank?

transfers

use internal funds called blank to pay for losses

rentention

borrowing money and issuing debt are examples of what?

retention (internal funds)

seek external sources from 3rd parties to finance losses, still have the asset or activity exposed to loss, transfer the financial responsibility for the loss not the asset/activity itself are all compenents of what?

Alternative risk financing mechansims

what is it called when you transfer the financial responsibility of the loss to the insurer?

insurance

where does non-insurance risk transfer to?

the fianancing type

what is an example of non-insurance risk transfers?

leases

is the tenant responsible for all property losses while occupying the property under the lease?

yes

who is responsible for the losses in the tenant fails to in this responsibility?

the owner

what is the term for a contract where one party agrees not to hold the other party responsible for certain risks or damanges?

a hold harmless agreement

what is called when an individual/firm engages in assuming the financial responsibility for losses that do occur?

retention

not buying insurance/insurance with a deductible are examples of what?

retaining the exposure to loss examples

a firm sets aside funds every period to pay for losses

funded

say a firm believes cost for the year is $1.2 million and they set aside $100,000 a month

funded retention (better for losses that are predictable and high in severity)

what is the term for paying for losses as they occur from money you have or money you borrow

unfunded retention

is unfunded retention better for losses that are low frequency and low in severity or high frequency and high severity?

low severity, low frequency

what type of retention is the deliberate decision to practice retention

active retention

what type of rentention is retaining the exposure to loss but you may be unaware (usually results from failure to identify)

passive retention

usually reserved for signifigant loss exposure where many exposure units exist (self insurance)

active funded rentention

what is the term for something that is not just comething that happens but rather well thought out strategy

formal program

A medical plan being fairly predictable is an example of ?

an ideal characteristic of self insurance

workers compensation, whic is a long payout period, is an example of what?

an ideal characteristic of self insurance

if mailing persciptions is illegal in states, it will not apply to you if you are self insured. what is this advantage of self insurance?

flexibility

which advantage of self insurance is saving from any loss prevention/reduction that goes directly into your pocket instead of through the insurance company?

time value of money

is self insurance cheaper for larger or smaller companies?

larger

could one large loss wipe you out when being self insured?

yes (disadvantage)

who has to perform administrative functions when dealing with self insurance?

the firm or they have to hire third parties, which cost money

who takes the blame for a PR scandal regarding self insurance?

the firm

certainty/peace of mond, serving other contracts, enhancing credit worthiness/protecting assets, and regulation/complience with the law are all reasons for what?

why people and firms purchase insurance

cost sharing and partial insurance is an example of what?

partial indemification

all losses are paid for no matter how large or small is called what?

full indemification

paying for some of your perscriptions with insurance is an example of what?

partial idemnification

What is the term associated to prevent the insured from making a profit from the insurance policy, as it's intended to cover losses, not provide financial gain

Principle of Idemnity

AVC measures what?

measures a loss

what is the prupose of the AVC?

To control moral hazard/prevent the insured from making a porfit from the loss

does AVC have meaning regarding life insurance?

NO

Does AVC apply to insurance for rare items?

NO

what is the captive's primary purpose?

insuring the risks of the parent or parents of company

what are the two types of captives?

single parent captive and group captive

what is the main reason of having a captive

save money on premium

What type of captive is the one owned by Temple?

Group Captive

What is one distinct disadvantage the Temple captive would have vs a single parent captive owned by comcast?

income tax break of writing off premium paid to captive

what is the difference between funded and unfunded retention?

funded you save money to pay for future losses-unfunded you pay as you go

what are the two ideal characteristics for self-insurance?

losses are predictable and losses that have a long pay out window

Premium =

pure premium + risk charge + loading (admin)

Advantages to self insurance

no premium taxes, administrative expenses, marketing expenses

Time value of Money (advantage to self insurance)

credits invested internally (produces higher rate), saving from any loss prevention that goes in your pocket instead of through insurance

Disadvantages to self insurance

stop loss insurance (safety net by reimbursing employers for claims that exceed a certain threshold, LARGE ORG. DON’T NEED THIS), start doing claims settlement, return to work programs, wellness programs, etc.

ASO (Administrative Services Only) contract

agreement between an employer and a third-party administrator (TPA) to manage employee benefits, typically for self-funded health plans.

Income Tax Treatment (disadvantage to self insurance)

Self-insured losses may not be eligible for premium deductions, unlike traditional insurance premiums, The income generated from self-insurance reserves can be taxed, leading to increased taxable income

captive insurer reasons

tax reasons (Income taxes—IRS—group only)

Group Captive advantages

Cost Sharing: Lower costs through shared expenses and risk pooling among members, Risk Diversification: Spread risk across multiple entities, reducing volatility.