Retained Risk

Question 1

Define guaranteed cost policy

Answer 1

a policy where an entity transfers all liability to an insurer for a fixed prem

Question 2

Define retrospectively rated policy

Answer 2

• a policy where an entity transfers all liability based on actual loss experience
• final premium depends on an audited exposure base and loss experience

Question 3

Define large deductible policy

Answer 3

• a policy where an entity transfers all liability to an insurer but retains a substantial deductible
• final cost includes
  1. final prem
  2. losses within deductible
  3. claims handling costs

Question 4

Define self-insurance

Answer 4

an arrangement where an entity retains all risk or purchases coverage for large claims only (common for exposures where insurance is not required by regulation)

Question 5

Define claims made coverage

Answer 5

coverage where liability for claims reported after the policy expiration remains with the entity (unreported claims liability may accumulate for lines of business with reporting lags)

Question 6

Define captive

Answer 6

• affiliated insurance companies that can assume some or all of an entity’s liability
• captives are subject to less stringent regulation than admitted carriers (and can directly insure or reinsure the entity’s insurer)

Question 7

Define direct policy in relation to captive

Answer 7

a policy purchased directly from an affiliated captive insurer (typically used for coverages that would otherwise be self-insured)

Question 8

Define fronting arrangement

Answer 8

• an arrangement where an entity, having purchased a guaranteed cost policy, can transfer risk back to its captive (with the commercial insurer acting as “fronting” company for excess losses)

Question 9

Define deductible reimbursement

Answer 9

a policy written by a captive that directly reimburses the entity for its deductible obligations (covers entity’s obligations to the insurer but not to claimants)

Question 10

Define trust and its use in insurance

Answer 10

• a financial arrangement where funds or assets are set aside to cover potential losses
• commonly used to finance professional liability exposures (and provide coverage to affiliated entities on a direct basis)

Question 11

Contexts where retained risk actuarial analysis is generally used (3) (AIR)

Answer 11

• Adequacy of Accruals for Financial Reporting
• Internal Financial Reporting and Cost Allocation
• Regulatory Filing for Qualified Self-Insurance Designation

Question 12

Identify ways retained risk actuarial estimates can be used by company mgmt (2)

Answer 12

• to directly record accrual amount
• to validate the reasonableness of management estimates

Question 13

Identify items included in these accruals for retained liabilities (3)

Answer 13

Provisions for:
- deductibles
- self-insured exposure
- potential retrospective premium amounts

Question 14

Identify key considerations when comparing an actuarial estimate to a company’s ledger

Answer 14

• net or gross of ins recoverables
• discounting
• combined accruals that include other insurance-related balances

Question 15

What are combined accruals

Answer 15

financial entries that include multiple related accruals, where only a portion is considered in the actuarial analysis

Question 16

What challenges arise when comparing actuarial analysis with financial statement accruals

Answer 16

financial statement accruals may contain items that are not accounted for in the actuarial calculation (making direct comparisons difficult)

ex: TPA fees

Question 17

What timing related issues arise with prepaid balances or amounts due to TPAs and/or excess insurers (2)

Answer 17

• payments made but not yet reimbursed (by company to TPA) result in higher accruals
• advance payments lead to lower accruals

Question 18

How do companies address timing differences in accruals related to TPAs and excess insurers (3)

Answer 18

• adjust accruals
• carry a separate timing accrual
• treat the timing difference as immaterial

Question 19

What timing issues can arise with claims paid by the entity but not yet reimbursed by an excess insurance carrier?

Answer 19

when claims are paid but not yet reimbursed by excess insurance carriers

Question 20

What timing discrepancies can occur with retrospectively rated and large deductible policies

Answer 20

timing gaps between claim payments and premium payments

Question 21

What is the general requirement for a company applying for a Qualified Self-Insurance Designation

Answer 21

an actuarial report and certification along with its application package

Question 22

Who should provide the actuarial opinion for a self-insured application

Answer 22

a member in good standing of the CAS

Question 23

What should the actuarial opinion include for a self-insurance application?

Answer 23

actuarially appropriate reserves based on reserves estimated from the program’s inception to valuation date

Question 24

What additional elements should the actuarial opinion include for a self-insurance application

Answer 24

• identifying info about the actuary
• scope of opinion
• description of estimation methodology
• exhibit showing methodology
• data source info
• data reconciliation
• explanation of any data checking, verification, or auditing