RIsk Topic 5 Flashcards
(33 cards)
What type of captive is owned by Temple?
Group Captive
What is one distinct advantage a group captive has vs a single parent captive?
Income tax break of writing off premium paid to captive
What is the main reason captives exist?
To save money on the premium
What is the difference between funded and unfunded retention?
Funded you save money to pay for future losses – unfunded you pay as you go
What are the two ideal characteristics for self-insurance?
a. Losses that are predictable
b. Losses that have a long payout window
What are the three types of risk financing?
1) Use external funds called transfers
2) Use internal funds called retention
3) Borrow money, issue debt
How does retention work?
A firm or individual assumes the financial responsibility for the losses that occur
What are two examples of retention?
1) Not buying insurance
2) Insurance without a deductible
What is funded retention?
A firm sets aside funds every period to pay for losses
What type of losses is funded retention ideal for?
Losses that are predictable in nature and high in severity
What is unfunded retention?
No separate fund to pay for losses
- Company pays for losses as they occur (from your money or money you borrow from someone else)
What type of losses is unfunded retention ideal for?
Losses that are low frequency and low in severity
Ex) Losing a pen
What is active retention?
Deliberate decision to practice retention
What is passive retention?
Retaining the exposure to loss, but you may be unaware
What type of retention is self-insurance?
Active and funded retention
What type of loss exposures is self-insurance for?
Significant loss exposures where many units exist
What are the main advantages of self-insurance?
1) It’s flexible
2) No loading
3) Time value of money
What are the main disadvantages to self-insurance?
1) Catastrophic loss possibility
2) One large loss could wipe you out
3) Can be a PR nightmare
4) The firm may have to perform admin functions
5) Hard to return to the insurance market once you have left
What are the solutions to the catastrophic loss possibility?
- Stop loss insurance
- Insurance contract with a very large deductible
- Stop loss: So self insuring is still cheaper for larger organizations
How can a firm solve the problem of having to perform admin functions when self-insuring?
- ASO (Administrative services only) contract with insurer
- Can hire a TPA (Third party administration) to handle those functions
What are the negative PR implications associated with self-insurance?
- Could give the impression that the company is financially unstable
- Can’t pass the blame to the insurer when denying claims
Why is it hard to return to the insurance market once you have decided to self-insure?
You are considered more of an insurance risk
What does the tax code bias in terms of insurance?
The tax code biases buying insurance over self-funding
How is the income tax treatment for a company that self-insures?
- Losses and administrative expenses are tax deductible (only when paid)
- All other things equal
