ARM 402 ACTUAL FINAL EXAMS QUESTIONS AND
ANSWERS SET A+
✔✔Insurable Risks and Loss Exposures -✔✔-significant limitation is that insurance is
not available for some types of risks
-insurable risks are mainly confined to hazard risks and operational risks, while financial
risk and strategic risk are general uninsurable
-insurers are willing to insure a loss exposure that has all or most of these
characteristics:
*it's associated with pure risk
*it's accidental from the insured's standpoint
*it's definite and measurable
*it's one of a large number of similar exposure units: loss exposure must be common
enough that the insurer can pool a large number of similar exposure units, which
enables the insurer to predict losses accurately and determine appropriate premiums
*it's not catastrophic
*it's economically feasible to insure
✔✔Ability of Guaranteed Cost Insurance to Meet Risk Financing Goals -✔✔1. pay for
losses: yes provided the loss exposures are covered by the policies
2. maintain liquidity: yes bc insurance requires less liquidity compared with retention
3. manage uncertainty: yes bc uncertainty is transferred to insurer
4. comply with legal and regulatory requirements: yes
5. minimize the cost of risk: yes but not ideal bc premiums cover expected losses and
all associated costs
-additional benefit of guaranteed cost insurance is that an org can generally deduct
insurance premiums for income tax purposes
✔✔Large Deductible Plans -✔✔-an insurance policy with a significant per occurrence or
per accident deductible
-typically used to treat WC, auto, and GL loss exposures
-allow an org to pay a reduced premium for retaining losses below the deductible level;
org transfers the financial consequences of losses that exceed the deductible to the
insurer
,-as losses occur, insurer settles each claim and then periodically bills the insured org for
the amount of the loss up to the deductible
-org benefits from deferring cash outflows for its retained losses compared with paying a
premium up front
-insured usually must provide the insurer with a form of financial security, or collateral,
such as a letter of credit, to guarantee payment of covered losses up to the deductible
level
✔✔self-insured retention -✔✔-requires insured org to retain a relatively large amount of
loss
-insured org is responsible for adjusting and paying its own losses up to the SIR amount
-orgs with SIRs frequently outsource these tasks to independent claims adjusting orgs
✔✔Use of large deductible plans -✔✔-WC deductibles can apply on a per person
and/or per accident basis, auto deductibles apply on a period accident basis, GL
deductibles on a per occurrence basis
-such plans can also include an aggregate deductible, which caps total deductible
payments over a period of time (a year)
-amount that the insurer incurs to adjust losses, including legal defense costs, can be
either inside or outside deductible; outside: prorated between insured and insurer based
on size of loss
✔✔Benefits of large deductible plans -✔✔-motive for this plan is to reduce cost of risk
-reducing the premium helps for two main reasons: states impose various charges, such
as premium amounts and residual market loadings; an insurance premium includes
charges for the insurer's overhead costs and profit
-plan can significantly reduce cost of risk by helping orgs avoid substantial premium
taxes, residual market loadings, and insurer overhead and profit charges
-allow insured to benefit from cash flow available on their reserves for retained losses
-enhances insured's cash flow because these claims are paid out months/years after
they occur and insured only reimburses insurer after they pay
✔✔large deductible plans ability to meet risk financing goals -✔✔1. pay for losses: yes
bc insurer pays and insured reimburses them
2. maintain liquidity: yes if deductible level is carefully selected
3. manage uncertainty: yes, org can effectively manage cash flow uncertainty
4. comply with legal and regulatory requirements: yes for purchasing insurance bc an
insurer issues a policy guaranteeing that all covered claims will be paid
5. minimize the cost of risk: yes bc plan avoids substantial taxes, residual market
loadings, and insurer overhead and profit charges
✔✔Excess Liability Insurance -✔✔-to cover claims that exceed their primary insurance
limits or their retention amount for self-insured liability claims
-approach can be complicated by the fact that the various primary and excess policies
can be subject to different terms of coverage
,-types: follow form excess liability policies, self-contained excess liability policies,
umbrella liability policies
-two additional types of excess liability insurance: specific excess and aggregate excess
(often used in connection with self-insured WC obligations)
✔✔working layers -✔✔-the layers of coverage in an org's insurance program that are
most often called on to pay claims
-primary, umbrella, liability, and the first layer of excess policies above primary policies
not covered by the umbrella
✔✔Following Form Excess Liability Policies -✔✔-an excess liability policy that covers a
claim in excess of the underlying limits only if the loss is covered by the underlying
insurance
-"true" would state that except for policy limits, all of the provisions and conditions of the
designated underlying policy are incorporated into and adopted by the excess liability
policy, and it would contain no provisions conflicting with underlying policy; called
"concurrent"
-a lot of policies are called following form but not actually concurrent; ex: they have
some exclusions
✔✔Self-Contained Excess Liability policies -✔✔-an excess liability policy that is subject
to its own provisions only and does not depends on the provisions of the underlying
policies for determining the scope of its coverage
-coverage gaps between excess and underlying can occur
-an exception occurs when the excess liability policy provides coverage in excess of
aggregate limits in the underlying policy that have been reduced or exhausted by prior
claims
✔✔umbrella liability policies -✔✔-usually applies in excess of an org's primary GL, auto,
and EL coverages (can be excess of EBL, PI, watercraft liab)
-umbrella policies perform these basic functions:
*provide excess limits above the each occurrence limits of the insured's underlying
policies
*take the place of the underlying insurance when underlying aggregate limits are
reduced or exhausted
*cover some claims are not covered by the insured's underlying policies, in excess of
the SIR specified in the policy
✔✔drop-down coverage -✔✔coverage provided by many umbrella liability policies for
(1) claims not covered at all by the underlying policies and (2) claims that are not
covered by an underlying policy only because the underlying policy's aggregate limits
have been depleted
✔✔Specific Excess Liability Policy -✔✔-an excess liability policy that requires the
insured to retain a stipulated amount of liability loss from the first dollar for all losses
resulting from each single occurrence or accident
, -the insurer then pays losses from occurrence in excess of the retention, up to the policy
limit
-can be combined with aggregate excess policy
✔✔aggregate excess liability policy -✔✔-an excess liability policy that requires the
insured to retain a specified amount of loss from the first dollar during a specified period
of time, usually one year
-the insurer then pays all loss for that period that exceeds the retention, up to the policy
limit
-can be combined with specific excess policy
✔✔admitted insurance -✔✔-insurance provided in a jurisdiction by an insurer that is
licensed to do business in that jurisdiction
-a multinational company that relies heavily on this for its coverage in foreign countries
is likely following a decentralized approach to cover its international exposures
-advantages:
*policy will be serviced locally, increasing likelihood that service will be aligned with local
practices
*premiums and claims will be paid in local currency, eliminating exchange rate risk
*local agents/brokers may be able to understand local coverage nuances and advise
better
*complying with local laws and doing business locally helps integrate company into local
community/economy
-disadvantages:
*policy written in foreign language - could have gaps, nonuniform conditions
*local policy may be more expensive if competition among insurers locally is not robust;
assessing financial strength of insurer could be hard
*effective solvency regulation, financial statements, and rating agencies of insurers may
be lacking locally
*purchasing locally lessens company's purchasing power and decentralizes risk
management strategy, which can weaken implementation of enterprise risk
management program
✔✔nonadmitted insurance -✔✔-insurance provided in a jurisdiction by an insurer that is
not licensed to do business within that jurisdiction
-advantages:
*admin control can be centralized (more efficient)
*financial strength of insurer is more easily determined
*policy written with same language as parent company
*payments made in domestic country's currency
-disadvantages:
*claims adjusting can be really complicated with local coverage and local insurer reps
*local management may not have confidence in nonadmitted coverage provided by
parent company's insurer and may decide to buy its own coverage locally
ANSWERS SET A+
✔✔Insurable Risks and Loss Exposures -✔✔-significant limitation is that insurance is
not available for some types of risks
-insurable risks are mainly confined to hazard risks and operational risks, while financial
risk and strategic risk are general uninsurable
-insurers are willing to insure a loss exposure that has all or most of these
characteristics:
*it's associated with pure risk
*it's accidental from the insured's standpoint
*it's definite and measurable
*it's one of a large number of similar exposure units: loss exposure must be common
enough that the insurer can pool a large number of similar exposure units, which
enables the insurer to predict losses accurately and determine appropriate premiums
*it's not catastrophic
*it's economically feasible to insure
✔✔Ability of Guaranteed Cost Insurance to Meet Risk Financing Goals -✔✔1. pay for
losses: yes provided the loss exposures are covered by the policies
2. maintain liquidity: yes bc insurance requires less liquidity compared with retention
3. manage uncertainty: yes bc uncertainty is transferred to insurer
4. comply with legal and regulatory requirements: yes
5. minimize the cost of risk: yes but not ideal bc premiums cover expected losses and
all associated costs
-additional benefit of guaranteed cost insurance is that an org can generally deduct
insurance premiums for income tax purposes
✔✔Large Deductible Plans -✔✔-an insurance policy with a significant per occurrence or
per accident deductible
-typically used to treat WC, auto, and GL loss exposures
-allow an org to pay a reduced premium for retaining losses below the deductible level;
org transfers the financial consequences of losses that exceed the deductible to the
insurer
,-as losses occur, insurer settles each claim and then periodically bills the insured org for
the amount of the loss up to the deductible
-org benefits from deferring cash outflows for its retained losses compared with paying a
premium up front
-insured usually must provide the insurer with a form of financial security, or collateral,
such as a letter of credit, to guarantee payment of covered losses up to the deductible
level
✔✔self-insured retention -✔✔-requires insured org to retain a relatively large amount of
loss
-insured org is responsible for adjusting and paying its own losses up to the SIR amount
-orgs with SIRs frequently outsource these tasks to independent claims adjusting orgs
✔✔Use of large deductible plans -✔✔-WC deductibles can apply on a per person
and/or per accident basis, auto deductibles apply on a period accident basis, GL
deductibles on a per occurrence basis
-such plans can also include an aggregate deductible, which caps total deductible
payments over a period of time (a year)
-amount that the insurer incurs to adjust losses, including legal defense costs, can be
either inside or outside deductible; outside: prorated between insured and insurer based
on size of loss
✔✔Benefits of large deductible plans -✔✔-motive for this plan is to reduce cost of risk
-reducing the premium helps for two main reasons: states impose various charges, such
as premium amounts and residual market loadings; an insurance premium includes
charges for the insurer's overhead costs and profit
-plan can significantly reduce cost of risk by helping orgs avoid substantial premium
taxes, residual market loadings, and insurer overhead and profit charges
-allow insured to benefit from cash flow available on their reserves for retained losses
-enhances insured's cash flow because these claims are paid out months/years after
they occur and insured only reimburses insurer after they pay
✔✔large deductible plans ability to meet risk financing goals -✔✔1. pay for losses: yes
bc insurer pays and insured reimburses them
2. maintain liquidity: yes if deductible level is carefully selected
3. manage uncertainty: yes, org can effectively manage cash flow uncertainty
4. comply with legal and regulatory requirements: yes for purchasing insurance bc an
insurer issues a policy guaranteeing that all covered claims will be paid
5. minimize the cost of risk: yes bc plan avoids substantial taxes, residual market
loadings, and insurer overhead and profit charges
✔✔Excess Liability Insurance -✔✔-to cover claims that exceed their primary insurance
limits or their retention amount for self-insured liability claims
-approach can be complicated by the fact that the various primary and excess policies
can be subject to different terms of coverage
,-types: follow form excess liability policies, self-contained excess liability policies,
umbrella liability policies
-two additional types of excess liability insurance: specific excess and aggregate excess
(often used in connection with self-insured WC obligations)
✔✔working layers -✔✔-the layers of coverage in an org's insurance program that are
most often called on to pay claims
-primary, umbrella, liability, and the first layer of excess policies above primary policies
not covered by the umbrella
✔✔Following Form Excess Liability Policies -✔✔-an excess liability policy that covers a
claim in excess of the underlying limits only if the loss is covered by the underlying
insurance
-"true" would state that except for policy limits, all of the provisions and conditions of the
designated underlying policy are incorporated into and adopted by the excess liability
policy, and it would contain no provisions conflicting with underlying policy; called
"concurrent"
-a lot of policies are called following form but not actually concurrent; ex: they have
some exclusions
✔✔Self-Contained Excess Liability policies -✔✔-an excess liability policy that is subject
to its own provisions only and does not depends on the provisions of the underlying
policies for determining the scope of its coverage
-coverage gaps between excess and underlying can occur
-an exception occurs when the excess liability policy provides coverage in excess of
aggregate limits in the underlying policy that have been reduced or exhausted by prior
claims
✔✔umbrella liability policies -✔✔-usually applies in excess of an org's primary GL, auto,
and EL coverages (can be excess of EBL, PI, watercraft liab)
-umbrella policies perform these basic functions:
*provide excess limits above the each occurrence limits of the insured's underlying
policies
*take the place of the underlying insurance when underlying aggregate limits are
reduced or exhausted
*cover some claims are not covered by the insured's underlying policies, in excess of
the SIR specified in the policy
✔✔drop-down coverage -✔✔coverage provided by many umbrella liability policies for
(1) claims not covered at all by the underlying policies and (2) claims that are not
covered by an underlying policy only because the underlying policy's aggregate limits
have been depleted
✔✔Specific Excess Liability Policy -✔✔-an excess liability policy that requires the
insured to retain a stipulated amount of liability loss from the first dollar for all losses
resulting from each single occurrence or accident
, -the insurer then pays losses from occurrence in excess of the retention, up to the policy
limit
-can be combined with aggregate excess policy
✔✔aggregate excess liability policy -✔✔-an excess liability policy that requires the
insured to retain a specified amount of loss from the first dollar during a specified period
of time, usually one year
-the insurer then pays all loss for that period that exceeds the retention, up to the policy
limit
-can be combined with specific excess policy
✔✔admitted insurance -✔✔-insurance provided in a jurisdiction by an insurer that is
licensed to do business in that jurisdiction
-a multinational company that relies heavily on this for its coverage in foreign countries
is likely following a decentralized approach to cover its international exposures
-advantages:
*policy will be serviced locally, increasing likelihood that service will be aligned with local
practices
*premiums and claims will be paid in local currency, eliminating exchange rate risk
*local agents/brokers may be able to understand local coverage nuances and advise
better
*complying with local laws and doing business locally helps integrate company into local
community/economy
-disadvantages:
*policy written in foreign language - could have gaps, nonuniform conditions
*local policy may be more expensive if competition among insurers locally is not robust;
assessing financial strength of insurer could be hard
*effective solvency regulation, financial statements, and rating agencies of insurers may
be lacking locally
*purchasing locally lessens company's purchasing power and decentralizes risk
management strategy, which can weaken implementation of enterprise risk
management program
✔✔nonadmitted insurance -✔✔-insurance provided in a jurisdiction by an insurer that is
not licensed to do business within that jurisdiction
-advantages:
*admin control can be centralized (more efficient)
*financial strength of insurer is more easily determined
*policy written with same language as parent company
*payments made in domestic country's currency
-disadvantages:
*claims adjusting can be really complicated with local coverage and local insurer reps
*local management may not have confidence in nonadmitted coverage provided by
parent company's insurer and may decide to buy its own coverage locally
