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M67 - Fundamentals of Risk Management > Risk Financing, Retention and transfer > Flashcards

Risk Financing, Retention and transfer Flashcards

1
Q

How can the cost of risk incidents be categorised?

A

Monetary, timing, administration and opportunity

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2
Q

What is the initial monetary cost of an incident?

A

Cost of replacing any assets that have been lost, including awards made against them by courts, litigation costs and any regulatory fine

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3
Q

What is an opportunity cost in an incident?

A

No longer produce goods and services due to machine downtown or location damage.

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4
Q

What is the process of planning what an organisation will do if a major incident occurs?

A

Business continuity management (BCM)

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5
Q

Does the insurance market only provide financial protection in the case of loss or damage arising from some risk faced by an organisation?

A

Yes

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6
Q

What does EL insurance provide?

A

Gives financial protection to employers from claims for damages brought against them by their employees for bodily injury or illness arising out of or in the course of employment.

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7
Q

Consolidation among insurers is enabling them to…

A

offer greater financial strength needed by modern organisations

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8
Q

What are the advantages of using insurance?

A
  • economic vehicle for sharing exposures with a large number of organisations
  • insurers have a wealth of experience in risk and risk funding
  • insurers can provide additional services
  • fast access to funds means organisation has more cash for long-term investments
  • premiums may be tax deductible
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9
Q

What are the disadvantages to insurance?

A
  • insurers constrained by need to measure losses in monetary terms
  • organisation sees impact not cause as main concern
  • insurers want to contain risk acceptance and pricing to the short term
  • elements that add to the premium may not add value to the insured.
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10
Q

Does the IA and CIDRA prevent insurers turning representations into legal warranties?

A

Yes

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11
Q

What is the PRA responsible for?

A

Stability of financial firms and promoting their safety and soundness

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12
Q

What is the FCA responsible for?

A

ensuring financial market function competitively and efficiently and consumers are treated fairly

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13
Q

What are the FCA’s operational objectives?

A
  1. Consumer protections
  2. Protect and enhance financial system
  3. Competition
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14
Q

What are the PRA’s three objectives?

A
  1. promote safety and soundness of the firms it regulates
  2. protection for customers
  3. Secondary = Competition
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15
Q

What does the Solvency II set out?

A

Solvency capital requirement (SCR) and minimum capital requirements (MCR) levels.

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16
Q

What is the SCR?

A

Amount of money at risk over a one-year period to a confidence level of 99.5%

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17
Q

What is the MCR?

A

Amount of money at risk over a one-year period to a confidence level of 85% but with statutory minimum values.

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18
Q

The PRA is not concerned with ERM and corporate governance systems. True or false

A

False

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19
Q

What are the benefits of Solvency II?

A
  • reduce the risk of failure of default by an insurer
  • make it easier for companies to sell across different markets
  • improve risk assessment
  • improve financial management
  • improve regulation of firms
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20
Q

What are the costs of Solvency II?

A
  • putting in place staffing and maintaining systems

- wrong hands gets hold of data

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21
Q

The Insurance sector is interdependent? True or false

A

False

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22
Q

What does the McCarran-Ferguson Act 1945 declare?

A

States should regulate insurance in the publics best interest

23
Q

What was traditionally the main role of an insurance broker?

A
  • provide advice on selection of insurers
  • execute instructions
  • provide a risk survey service
24
Q

What is the role of a broker?

A

To assist their client on achieving their risk management objectives

25
Q

How regulates brokers?

A

FCA

26
Q

What are the two examples of property surveys?

A
  • Underwriting surveys

- risk control surveys

27
Q

What are underwriting surveys?

A

Determine the risk information needed by insurers to underwrite the risk

28
Q

What are risk control surveys?

A

Provide broker’s client with an expert assessment of risks inherent in the premises.

29
Q

What is a business interruption review?

A

Assessing the dependency a business has on its clients and suppliers

30
Q

What are post-loss control services?

A

identifying claim/loss trends

31
Q

What factors may influence level of retention?

A
  • Organisation’s view on probability of loss
  • Risk appetite
  • Insurance market conditions
  • Cash flow
  • Public company?
  • Attitude and experience of the board
  • Senior management understanding aims of the risk programme
32
Q

Risk being retained in return for a reduced premium is an example of…

A

deductible agreement

33
Q

Do claim costs inflate at a faster rate than general inflation

A

Yes

34
Q

What is co-insurance?

A

One or more insurer taking a share of the risk

35
Q

What is an umbrella policy?

A

Sits over the policy but is independent of the cover provided underneath.

Own terms and conditions

36
Q

What are the advantages of retaining risks?

A

Capital is retained
Reduction in admin costs
Line manager encouraged to own and manage risks

37
Q

What are the disadvantages of retaining risks?

A

Claims handling skills may be needed
Miscalculations
Fluctuations in loss levels will upset forecast

38
Q

What are the two type of reinsurance

A

Facultative and obligatory

39
Q

What is facultative reinsurance?

A

Option to the reinsurer to accept or reject the risk

40
Q

What is obligatory reinsurance?

A

insurers are obliged to cede and the reinsurer to accept a share of the portfolio of risks

41
Q

What are the types of risk transfer by contract?

A

Leases, subcontracts, surety agreements, guarantees, waivers

42
Q

What are surety agreements?

A

Contract make between three parties where the surety takes the risk that the principal to a contract does not complete

43
Q

What is necessary for successful risk transfer?

A
  • Contract terms are enforceable
  • Contract terms are unambiguous
  • Person you have transferred the risk to can manage it
  • Price paid for the risk transfer is reasonable
44
Q

What are the disadvantages to risk transfer?

A

Counter-party may include the cost of a risk in the price

Counter-party may be unable to meet its contractual obligations

45
Q

What are the disadvantages of alternative risk transfer

A
  • Payment is not necessarily linked to indemnity
  • Capital markets do not always bring claims skills
  • Instruments may not be treated sympathetically by regulators
46
Q

A contract to pay an agreed amount of money once a certain level of loss incident is reached is called…

A

An insurance derivative

47
Q

Investment bonds that provide a return to investors based on insurance type events are called…

A

Catastrophe bonds

48
Q

What is a SPRV and what does it do?

A

Special Purpose reinsurance vehicle

raises funds from investors, which it can deposit into a collateral account which is invested in securities

49
Q

What is a ‘put option’?

A

Become effective following a certain specified event. Damage organisation could use the contracted right to sell at a pre-agreed level

50
Q

What does Risk Impact limits involve calculating?

A
  • Single largest amount the organisation can afford to retain
  • aggregate of losses organisation can afford to retain
51
Q

What does the Insurance Act 2015 specifically require a commercial customer to do?

A

Make a fair presentation of the risk to the insurer.

52
Q

When evaluating risks and their potential impact and costs, what is the first step a business should take in developing a risk financing plan for these losses?

A

The correct answer is: Quantify the level of costs that can be absorbed without a significant impact on the company.

53
Q

A global retailer is concerned about the potential risk of hurricane damage. It has arranged a contract that will pay a predetermined amount if a category 3 or above hurricane occurs within a specified geographical area within a defined period. What type of risk transfer mechanism are they using?

A

An insurance derivative.

M67 - Fundamentals of Risk Management (7 decks)

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