Risk Financing Chapter 8

Front 1

Purpose of a captive insurance plan

Back 1

to provide insurance coverage to the parent in a manner that reduces the parent's cost of risk.

Front 2

General characteristics of a common captive insurance plan

Back 2

Contains aspects of retention and transfer plan.

Covers low to medium loss severity.

Losses are funded.

Substantial administrative requirements

Front 3

Characteristics of single parent captives

Back 3

Owned by one comapny

requires an investment of captial and expenditures by its parents

Generally requires a minimum annual premium of 2 million

Front 4

Characteristics of group captives

Back 4

Owned by a group of companies.

Insureds exercise a great deal of control over the management.

Front 5

Why is a single parent captive considered a hybrid risk financing plan

Back 5

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.

Front 6

How can an agent or broker generate underwriting and investment income

Back 6

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.

Front 7

Reasons a captive may help an organization reduce its cost of risk.

Back 7

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.

Front 8

Describe how having direct access to reinsurers may benefit a captive insurer

Back 8

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.

Front 9

Identify the two key factors the IRS uses to determine whether an insured's premiums paid to the captive insurer are tax deductible

Back 9

Adequate risk shifting and distribution of loss exposures

Front 10

Describe possible disadvantage of using a captive insurance

Back 10

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.

Front 11

Actions a risk management professional should perform when conducting a captive involvment feasibility study

Back 11

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.

Front 12

Why do captive insurers use fronting companies?

Back 12

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.

Front 13

Why may a fronting company require a letter of credit from the captive unsurer

Back 13

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.

Front 14

What is the premium arrangement between a parent and the captive insurer

Back 14

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.

Front 15

Factors considered when an organization evaluates the domicile of the captive.

Back 15

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.

Front 16

Captive insurer

Back 16

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,

Front 17

Single-parent captive or pure captive

Back 17

A captive insurer owned by one company that insures all or part of the loss exposure of that company

Front 18

Group captive

Back 18

A captive insurer owned by a group of companies, usually operating similar business, rather than a single parent.

Front 19

Association captive

Back 19

A group captive that is sponsored by an association

Front 20

Risk retention group

Back 20

A group captive formed under the requirements of the U.S. liability risk Retention Act to provide liability coverage.

Front 21

Agency captive

Back 21

A type of group captive that is owned by insurance agents or brokers rather than by organizations insured.

Front 22

Rent a captive

Back 22

An arrangement in which an organization rents capital from a captive insurer, to which it pays premiums and receives reimbursement for its losses.

Front 23

Protected cell company

Back 23

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

Front 24

Brother-Sister relationsip

Back 24

The relationship that exists when subsidiaries are owned by the same parent company.

Front 25

Third-party business

Back 25

Business that is not directly related to the captive's parent or its subsidiaries

Front 26

Fronting company

Back 26

A licensed insurer that isses an insurance policy and reinsures the loss exposures back to a captive insurer owned by the insured organization.

Front 27

Identify the actions captives perform for their parent companys

Back 27

A captive collects premiums, issues policies, and pays covered losses for its parent company.