Studied by 0 people
Looks like no one added any tags here yet for you.
Risk Transfer of the Finance Type
-seek external sources from 3rd parties to finance losses
-transfer financial responsibility for the loss, not the asset or activity itself
Insurance
-most common type of risk transfer finance
-transfer the financial responsibility of the loss to the insurer
Non-Insurance risk transfers of the Financing Type
-Leases: tenant is responsible for all property losses
If tenant fails to cover, owner is eventually responsible
Hold Harmless Agreement
-someone contractually accepts risk for you
ex. -contractor doing a project for you
-vendor performing a task
-company promises a firm doing work for them that they'll accept all responsibilities
Retention
-a firm or individual assumes the financial responsibility for losses that do occur
-Retain the exposure to loss
ex. not buying insurance
-insurance with a deductible
Funded
-a firm sets aside funds every period to pay for loss
-better for losses that are predictable and high in severity
ex. say firm believes P* for the year is $1-2M. they set aside $100K/month
Unfunded
-no separate fund to pay for losses
-pay for losses as they occur from money you have or borrow
-better for losses that are low frequency and low severity
Active Retention
deliberate decision to practice retention.
ex. you know about renter's insurance
Passive Retention
retaining the exposure to loss, but you may be unaware (usually results from failure to identify)
ex. you don't know about renter's insurance
Self Insurance
-planned and funded retention
-usually for significant loss exposures where many exposure units exist
Formal Program
not just something that happens -- it's a well thought out strategy (active)
Self Insurance - Ideal Characteristics
-Fairly predictable
-Long payout period
Advantages to Self insurance - Flexibility
-Most insurance contracts are very standardized
-avoid state mandated benefit laws
-ex. mom's cookie - just how you want it. you're not limited if it's self made.
No Loading in Self Insurance
-no administrative expenses
-no marketing expenses
Time Value of Money
-any credits are invested internally which would probably produce a higher rate
-saving from any loss prevention/reduction goes directly into your pocket instead of insurance company
Disadvantages of Self Insurance
-Catastrophic loss possibility
-Firm may have to perform administration functions
-Can be a Public Relations nightmare
-Hard to return to insurance market once you leave
Captive Insurer
-Wholly owned subsidiary of company
-A parent non-insurance company owns an insurance company
-Purpose is to insure the risks of the parent company
Types of Captive Insurers
-Single Parent Captive
-Association/Group Captive: Temple owns an insurance company with 16 other universities (Group Captive)
Captive Insurer Advantages
-Helps during "hard" markets
-Often located in Bermuda or Cayman Islands giving regulatory and income tax advantages
-Tax treatment in the U.S.
-Can write off premium if it is a true risk
True Risk Transfer
Parent risk makes up no more than 30% of the risk portfolio
Captive Insurer Reasons
-Save money on premium
-Freedom to cover or do whatever you want
-Tax reasons
