CPHRM Risk Financing 1 — Questions and Answers
Question 1: Which risk financing technique involves a healthcare organization retaining financial responsibility for losses within a defined layer before insurance coverage applies?
- Risk transfer
- Self-insured retention (SIR) (Correct answer)
- Prospective rating
- Quota share arrangement
Correct answer: Self-insured retention (SIR)
A self-insured retention (SIR) requires the organization to pay losses up to a set threshold before excess or umbrella coverage is triggered.
Question 2: A captive insurance company owned and controlled by a single parent healthcare organization is best described as a:
- Risk retention group
- Pure captive (Correct answer)
- Protected cell captive
- Reciprocal exchange
Correct answer: Pure captive
A pure captive is wholly owned by one parent entity and exists solely to insure the risks of that parent organization.
Question 3: Which actuarial method estimates ultimate losses by comparing paid losses at successive evaluation dates to project future development?
- Bornhuetter-Ferguson method
- Loss development (chain-ladder) method (Correct answer)
- Cape Cod method
- Frequency-severity method
Correct answer: Loss development (chain-ladder) method
The chain-ladder (loss development) method uses historical loss development factors applied to current paid or incurred losses to project ultimate losses.
Question 4: Under a retrospective rating plan, the final premium is determined primarily by:
- The insurer's fixed expense loading
- The insured's actual loss experience during the policy period (Correct answer)
- An industry-wide loss ratio
- Projected future losses only
Correct answer: The insured's actual loss experience during the policy period
Retrospective rating adjusts the premium after the policy period ends based on the organization's actual losses, rewarding favorable experience with lower costs.
Question 5: What is the primary purpose of an insurance trust fund or funded reserve in a healthcare self-insurance program?
- To eliminate the need for reinsurance
- To ensure adequate financial resources are available to pay future claims (Correct answer)
- To reduce tax liability on premium payments
- To satisfy state licensing requirements for insurers
Correct answer: To ensure adequate financial resources are available to pay future claims
A funded reserve ensures the organization has liquid assets set aside to cover anticipated losses, maintaining financial solvency for self-insured programs.
Question 6: Excess-of-loss reinsurance in healthcare risk financing protects the primary insurer or self-insurer against:
- Frequency of small losses across many claims
- Losses that exceed a specified retention per occurrence or in aggregate (Correct answer)
- All losses from a single line of coverage
- Administrative costs exceeding budget projections
Correct answer: Losses that exceed a specified retention per occurrence or in aggregate
Excess-of-loss reinsurance triggers when a single loss or aggregate losses exceed a predetermined threshold, transferring catastrophic exposure to the reinsurer.
Question 7: A risk retention group (RRG) under the Liability Risk Retention Act of 1986 must be:
- Owned and operated by an insurance company
- Owned by its policyholder members who share similar liability exposures (Correct answer)
- Capitalized exclusively by state government funds
- Regulated identically in all fifty states
Correct answer: Owned by its policyholder members who share similar liability exposures
RRGs are member-owned entities in which all policyholders share similar liability risks, and once licensed in one state they may operate in others with limited additional regulation.
CPHRM Risk Financing 1
Which risk financing technique involves a healthcare organization retaining financial responsibility for losses within a defined layer before insurance coverage applies?