Section C Flashcards

Question

Section C - Types of Risk Transfer "Claims Made Policies" Extended Reporting Period

Answer 1

covers claims reported after the end of the policy, usually for a limited period of time. In such cases, claims that will be reported during the extended reporting period are covered by insurance and thus may be treated as insured by the entity. Reporting periods extend for 30 to 90 days following the end of the policy period. Claims that will be reported during the extended reporting period are covered by the expiring policy until the inception of the renewal policy, at which time they transfer to the renewal policy. Note, however, that unless the extended reporting period is UNLIMITED, there well may be unreported claims that are expected to be reported after the end of the extended reporting period and thus remain uninsured. Also, an insured may purchase a separate policy that provides limited or unlimited extended reporting (tail) coverage

Answer 2

An entity can transfer SOME OR ALL of its liability to an affiliated insurance company known as a “captive.

Answer 3

typically are regulated by a special division within a state’s insurance department and are subject to somewhat less stringent regulation than an admitted carrier. Can be in non-US Domiciles subject to the local regulation.

Answer 4

Typically limit the coverages that a captive can write. A captive can either insure its affiliated entity DIRECTLY or REINSURE the entity’s insurer. Captives may limit their overall exposure by purchasing reinsurance

Answer 5

An entity can purchase insurance directly from its affiliated captive insurer

Answer 6

typical for coverages that would be otherwise self-insured, although self-insurers usually are not permitted to purchase workers’ compensation insurance from a captive

Answer 7

Often, a captive writing direct coverage will not fulfill financial responsibility requirements for personal or commercial automobile liability. Captive coverage also may be viewed as unacceptable in contracting situations where proof of insurance is required

Answer 8

Entities with captives often enter into arrangements that share risk between the captive and the commercial market

Answer 9

When the entity has purchased a guaranteed cost policy, it can take back some (or all) of the risk it has transferred by having its captive reinsure some of the risk In this case, the captive typically will reinsure losses on a ground-up basis, leaving losses excess of its limits with the commercial insurer. In this type of arrangement, the commercial carrier is known as a “fronting” company

Answer 10

In the case where the entity has purchased a large deductible policy, the captive can write a policy directly reimbursing the entity for its deductible obligations. (a way to indirectly have WC and AL coverage using a captive)

Answer 11

In this case, the captive covers its affiliated entity for the entity’s obligations to the insurer NOT for its obligations to claimants. A deductible reimbursement policy, then, can be used to transfer the entity’s retained cost for workers’ compensation or automobile liability losses to a captive without running afoul of regulations limiting the direct writing of such coverages in captives

Answer 12

Trusts most often are used to finance professional liability exposures and may be treated as separate entities with their own audited financial statements

Answer 13

Coverage typically is provided to an affiliated entity on a direct basis, often when risk management and documentation of costs is required.

Answer 14

Trusts often provide coverage to their affiliated entities on a claims-made basis, leaving the unreported claims with the original entity

Answer 15

Excess insurance may be purchased by the original entity or by the trust

Answer 16

Considerations for unpaid claim estimates are covered in detail in ASOP No. 43. This section addresses some unusual considerations that may be encountered by the actuary in the context of retained risk.

Answer 17

Typically a retained risk actuarial analysis will be used in one of 3 contexts or any combination of the 3: 1. Adequacy of Accruals for Financial Reporting 2. Internal Financial Reporting and Cost Allocation 3.Regulatory Filing for a Qualified Self-Insurance Designation

Answer 18

Frequently actuaries are asked to estimate the indicated financial accrual for self-insured or retained liabilities. Company management may utilize the actuarial indications to directly record the accrual or as a control to confirm the reasonableness of the management estimates The accruals can include provisions for deductibles, self-insured exposure, or potential retrospective premium amounts. Many key issues arise when values will be used for financial reporting since the actuarial estimates as presented in an actuarial work product may be compared to amounts recorded in a company’s general ledger. Key Considerations: 1.Net or Gross of Insurance Recoverables 2.Discounting for the Time Value of Money 3. Combined Accruals that Include Other Insurance-Related Balances 4. Prepaid Balances or Amounts Due From or To TPAs and/or Excess Insurers

Answer 19

E.G US GAAP accounting requires the separate presentation of a gross liability accrual for expected future loss payments and an asset related for the related expected insurance recoveries, which may partially offset the gross liability for economic purposes Cons: more complex than a net analysis.

Answer 20

Companies may elect or be required under different accounting frameworks to reduce their accrual estimates for the time value of money Cons: The pattern of cash flows for discounting purposes match the cash flow pattern for the entity, which may not match the cash flows to claimants

Answer 21

E.G , the financial statement accrual may contain lines of business or insurance-related items such as third-party administrator (TPA) fees that may not be contemplated in the actuarial calculation Cons: difficult to produce a direct comparison of the results of the actuarial analysis with the financial statement entry.

Section C Flashcards

(46 cards)