ARM 402 COMPLETE QUESTIONS AND
SOLUTIONS TESTED ANSWERS
◉ Types of Excess of Loss Reinsurance Agreements
Answer: 1. per risk excess of loss reinsurance: limits amount
primary insurer will have to pay for each risk
2. catastrophe excess of loss reinsurance: protects primary from an
accumulation of retained losses from a single catastrophic event
3. per policy excess of loss reinsurance: limits amount primary will
have to pay under each policy, regardless of number of losses (used
primarily with liability)
4. per occurrence excess of loss reinsurance: limits amount primary
will have to pay for all loss resulting from a single event affecting one
or more of the primary's policies (used with liability insurance)
5. aggregate excess of loss reinsurance: limits amount the primary
will have to pay for aggregated losses that occur over a stated period
(can be used for property or liability insurance)
◉ cut-through clauses
Answer: -when an insured org is concerned about the solvency of
one of its insurers, the org may seek the addition of this to the
reinsurance agreement between the insurer and its reinsurer
-usually requested when the insurer does not satisfy the financial
standards established by the insured org's lender
,-clause provides that in the event of the primary insurer's
insolvency, the reinsurer will pay any resinsurance proceeds directly
to the designated payee, which could be the insured org, the lender,
or both
-reinsurers usually accommodate this because it is in their and the
primary's best interest to keep the insured org's business
◉ Noninsurance Contractual risk transfer
Answer: -one party (transferee), which is not an insurance company,
accepts another party's (transferor's) loss exposures or financial
consequences of the transferor's loss exposures as an incidental
aspect of another business transaction
-two types:
1. a noninsurance transfer for risk control shifts loss exposures to
the transferee to reduce the frequency and/or severity of the
transferor's losses arising from the loss exposures: a bankrupt or
uncooperative transferee may continue to be responsible for losses
arising from the transferred loss exposures, preserving the
transferor's protection
2. a noninsurance transfer for risk financing transfers only the
financial consequences of the transferor's loss exposures: an
insolvent transferee provides no protection to the transferor, who
must then pay for its own accidental loss
◉ Types of noninsurance Transfer for risk control
Answer: 1. leasing
,2. contracting of services
3. waiver or exculpatory clause
4. disclaimer of warranties
◉ Leasing
Answer: -certain losses that can arise from property ownership
don't exist for a lessee occupying the property; losses include
accidental damage and liability to third parties resulting from
hazards on the property
-two important exceptions apply: lease obligates the lessee to return
the property to the lessor in the same condition in which it was
received or the lessee is at fault in causing harm to others
-an org that leases property instead of owning it practices risk
control by allowing the property owner to retain the risks related to
property ownership
◉ Contracting for Services
Answer: -an individual or org that performs a particular activity is
generally held primarily responsibly for any losses caused by that
activity -- this can be transferred by contracting with another org to
perform the activity
-contractor is liable for his work but injured party could sue the
property owner
-because courts want to compensate the injured, they favor
restricting the rule exempting the person who hires a contractor
, from liability for the contractor's torts; so they have established
some exceptions to this rule:
1. the principal is directly liable for negligence in selecting the
contractor, giving directions, or failing to stop any unnecessary
dangerous practices of which the principle was aware
2. the principal's (person who hired contractor) responsibility for
certain duties to be performed safely can't be delegated to another
party
3. if the subcontracted work is inherently dangerous to others
(blasting example), the principal that hired the contractor can be
held liable for a third-party injury caused by the contractor's
negligence
◉ Waiver or Exculpatory Clause
Answer: -both can transfer responsibility for liability loss exposures
-an individual or org can give up its right to sue another party
through a waiver
-exculpatory clause: a contractual provision purporting to excuse a
party from liability resulting from negligence or an otherwise
wrongful act
◉ Disclaimer of Warranties
Answer: -sellers of property often assert disclaimers of warranties
-a disclaimer in a sales contract may deny any express warranties
during the property's sale
SOLUTIONS TESTED ANSWERS
◉ Types of Excess of Loss Reinsurance Agreements
Answer: 1. per risk excess of loss reinsurance: limits amount
primary insurer will have to pay for each risk
2. catastrophe excess of loss reinsurance: protects primary from an
accumulation of retained losses from a single catastrophic event
3. per policy excess of loss reinsurance: limits amount primary will
have to pay under each policy, regardless of number of losses (used
primarily with liability)
4. per occurrence excess of loss reinsurance: limits amount primary
will have to pay for all loss resulting from a single event affecting one
or more of the primary's policies (used with liability insurance)
5. aggregate excess of loss reinsurance: limits amount the primary
will have to pay for aggregated losses that occur over a stated period
(can be used for property or liability insurance)
◉ cut-through clauses
Answer: -when an insured org is concerned about the solvency of
one of its insurers, the org may seek the addition of this to the
reinsurance agreement between the insurer and its reinsurer
-usually requested when the insurer does not satisfy the financial
standards established by the insured org's lender
,-clause provides that in the event of the primary insurer's
insolvency, the reinsurer will pay any resinsurance proceeds directly
to the designated payee, which could be the insured org, the lender,
or both
-reinsurers usually accommodate this because it is in their and the
primary's best interest to keep the insured org's business
◉ Noninsurance Contractual risk transfer
Answer: -one party (transferee), which is not an insurance company,
accepts another party's (transferor's) loss exposures or financial
consequences of the transferor's loss exposures as an incidental
aspect of another business transaction
-two types:
1. a noninsurance transfer for risk control shifts loss exposures to
the transferee to reduce the frequency and/or severity of the
transferor's losses arising from the loss exposures: a bankrupt or
uncooperative transferee may continue to be responsible for losses
arising from the transferred loss exposures, preserving the
transferor's protection
2. a noninsurance transfer for risk financing transfers only the
financial consequences of the transferor's loss exposures: an
insolvent transferee provides no protection to the transferor, who
must then pay for its own accidental loss
◉ Types of noninsurance Transfer for risk control
Answer: 1. leasing
,2. contracting of services
3. waiver or exculpatory clause
4. disclaimer of warranties
◉ Leasing
Answer: -certain losses that can arise from property ownership
don't exist for a lessee occupying the property; losses include
accidental damage and liability to third parties resulting from
hazards on the property
-two important exceptions apply: lease obligates the lessee to return
the property to the lessor in the same condition in which it was
received or the lessee is at fault in causing harm to others
-an org that leases property instead of owning it practices risk
control by allowing the property owner to retain the risks related to
property ownership
◉ Contracting for Services
Answer: -an individual or org that performs a particular activity is
generally held primarily responsibly for any losses caused by that
activity -- this can be transferred by contracting with another org to
perform the activity
-contractor is liable for his work but injured party could sue the
property owner
-because courts want to compensate the injured, they favor
restricting the rule exempting the person who hires a contractor
, from liability for the contractor's torts; so they have established
some exceptions to this rule:
1. the principal is directly liable for negligence in selecting the
contractor, giving directions, or failing to stop any unnecessary
dangerous practices of which the principle was aware
2. the principal's (person who hired contractor) responsibility for
certain duties to be performed safely can't be delegated to another
party
3. if the subcontracted work is inherently dangerous to others
(blasting example), the principal that hired the contractor can be
held liable for a third-party injury caused by the contractor's
negligence
◉ Waiver or Exculpatory Clause
Answer: -both can transfer responsibility for liability loss exposures
-an individual or org can give up its right to sue another party
through a waiver
-exculpatory clause: a contractual provision purporting to excuse a
party from liability resulting from negligence or an otherwise
wrongful act
◉ Disclaimer of Warranties
Answer: -sellers of property often assert disclaimers of warranties
-a disclaimer in a sales contract may deny any express warranties
during the property's sale
