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27 Cards in this Set
- Front
- Back
Purpose of a captive insurance plan
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to provide insurance coverage to the parent in a manner that reduces the parent's cost of risk.
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General characteristics of a common captive insurance plan
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Contains aspects of retention and transfer plan.
Covers low to medium loss severity. Losses are funded. Substantial administrative requirements |
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Characteristics of single parent captives
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Owned by one comapny
requires an investment of captial and expenditures by its parents Generally requires a minimum annual premium of 2 million |
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Characteristics of group captives
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Owned by a group of companies.
Insureds exercise a great deal of control over the management. |
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Why is a single parent captive considered a hybrid risk financing plan
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because it combines elements of retention and transfer. The captive covers its parent's losses and losses retained by the captive are retained by its parent.
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How can an agent or broker generate underwriting and investment income
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by forming an agency captive to insure select accounts in response to hard markets. Because the captive is owned by insurance agents or brokers rather than by the insured, the underwriting and investment income from the agency captive flows to the agent or broker.
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Reasons a captive may help an organization reduce its cost of risk.
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involves retention
saves acquistion costs of obtaining insurances reduces underwriting expenses specializes in claim adjusting functions saves the cost of the commercial insurers overhead and profits allows for investment income from premium, loss reserve and collateral investment dollars. |
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Describe how having direct access to reinsurers may benefit a captive insurer
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reinsurers can be more flexible than insurers in terms of underwriting and rating, the captive can capture the ceding commission on reinsurance and the insured/owner saves substantial markup costs.
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Identify the two key factors the IRS uses to determine whether an insured's premiums paid to the captive insurer are tax deductible
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Adequate risk shifting and distribution of loss exposures
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Describe possible disadvantage of using a captive insurance
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Capital requirements and start up costs.
Sensitivity to losses. Pressure from parent company management - the captive must insure the risk required by its parent. Payment of premium taxes and residual market loadings - Losses retained are paid for by the parent as a premium on which premium taxes and residual market loadings are levied. |
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Actions a risk management professional should perform when conducting a captive involvment feasibility study
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Obtain an understanding of senior management's objective regarding captive involvement.
Obtain senior management's approval Analyze the parent company's current risk financing structure Assess the exposure basis of the parent company. Assess the parent company's accidental loss history. |
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Why do captive insurers use fronting companies?
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because they provide a way to save the time and expense of obtaining licenses. Captive insurers that use fronting companies operate as reinsurers behind U.S. licensed insurers.
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Why may a fronting company require a letter of credit from the captive unsurer
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the fronting company retains the risk that the captive may not have sufficient funds to reimburse it for payment of covered losses. A letter of credit or some other type of financial guarantee offsets the credit risk.
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What is the premium arrangement between a parent and the captive insurer
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a. Guaranteed cost basis - the insured organization pays a fixed premium rate, transferring the entire loss exposure to its captive.
b. Retrospectively rated basis - The premium rate adjusts based on a portion of the insured's occurred losses during the policy period. |
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Factors considered when an organization evaluates the domicile of the captive.
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Min premium requirements.
Min capitalization. Solvency requirements Incorporation and registration expenses Local taxes. Types of insurance that can be written. General regulatory environment Investment restrictions Ease and reliability of commuications and travel to and from the domicile Policital stability Support infrastructure in terms of captive managers, claim administrators, bankers, accountants, lawyers, actuaries, and other services. |
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Captive insurer
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A subsidiary formed to insure the loss exposures of its parent company and affiliates whose primary purpose usually is to reduce the parent's cost of ris,
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Single-parent captive or pure captive
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A captive insurer owned by one company that insures all or part of the loss exposure of that company
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Group captive
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A captive insurer owned by a group of companies, usually operating similar business, rather than a single parent.
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Association captive
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A group captive that is sponsored by an association
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Risk retention group
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A group captive formed under the requirements of the U.S. liability risk Retention Act to provide liability coverage.
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Agency captive
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A type of group captive that is owned by insurance agents or brokers rather than by organizations insured.
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Rent a captive
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An arrangement in which an organization rents capital from a captive insurer, to which it pays premiums and receives reimbursement for its losses.
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Protected cell company
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A group captive in which each participant pays premiums and receives reimbursement for its losses from, as well, as credit for, underwriting profits and investment income, similar to a rent-a-captive
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Brother-Sister relationsip
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The relationship that exists when subsidiaries are owned by the same parent company.
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Third-party business
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Business that is not directly related to the captive's parent or its subsidiaries
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Fronting company
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A licensed insurer that isses an insurance policy and reinsures the loss exposures back to a captive insurer owned by the insured organization.
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Identify the actions captives perform for their parent companys
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A captive collects premiums, issues policies, and pays covered losses for its parent company.
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