CPHRM Risk Financing 2 — Questions and Answers
Question 1: Which risk financing option provides the greatest potential cost savings to a healthcare organization with consistently favorable loss experience?
- Guaranteed-cost insurance
- Self-insurance with a funded reserve (Correct answer)
- Finite risk insurance
- Occurrence-based commercial insurance
Correct answer: Self-insurance with a funded reserve
Self-insurance allows organizations with low and predictable losses to retain premium savings rather than paying fixed commercial premiums that include insurer profit and overhead.
Question 2: Loss reserves established in a healthcare self-insurance program represent:
- Collected premiums held in escrow by the state
- An estimate of the total cost of known and unreported claims yet to be fully paid (Correct answer)
- Surplus funds transferred to a captive insurer
- Reinsurance recoverables already received
Correct answer: An estimate of the total cost of known and unreported claims yet to be fully paid
Loss reserves are actuarially estimated liabilities reflecting both reported but unpaid claims (RBNS) and incurred-but-not-reported (IBNR) claims.
Question 3: The 'tail' coverage endorsement in a claims-made professional liability policy covers:
- Claims filed before the policy inception date
- Claims arising from incidents that occurred during the policy period but reported after it expires (Correct answer)
- Third-party bodily injury claims only
- Claims arising from contractual liability
Correct answer: Claims arising from incidents that occurred during the policy period but reported after it expires
Tail (extended reporting period) coverage protects the insured for claims reported after a claims-made policy ends for incidents that occurred while the policy was in force.
Question 4: When evaluating alternative risk transfer (ART) mechanisms, a healthcare risk manager should primarily assess:
- The credit rating of the reinsurance broker only
- Cost-effectiveness, financial security of the arrangement, and alignment with the organization's risk tolerance (Correct answer)
- Whether the ART vehicle complies with IRS Section 831(b)
- The geographic diversification of the insurer's portfolio
Correct answer: Cost-effectiveness, financial security of the arrangement, and alignment with the organization's risk tolerance
Evaluating ART mechanisms requires balancing cost efficiency, the financial soundness of counterparties, and whether the structure fits the organization's overall risk appetite.
Question 5: Which term describes the annual premium paid to a captive insurer that is set to cover expected losses plus administrative and reinsurance costs?
- Burning cost premium
- Loss-sensitive premium
- Pure premium (Correct answer)
- Prospective premium
Correct answer: Pure premium
The pure premium (or burning cost) represents expected losses per unit of exposure and forms the foundation for captive pricing before adding loadings for expenses and profit.
Question 6: Aggregate stop-loss coverage in a self-insured healthcare program is designed to:
- Cap individual large claims at a per-occurrence limit
- Limit the total amount the organization pays in losses during a policy year (Correct answer)
- Provide coverage for claims reported in prior policy years
- Replace occurrence-based coverage for surgical events
Correct answer: Limit the total amount the organization pays in losses during a policy year
Aggregate stop-loss sets a maximum annual out-of-pocket loss figure; once total losses exceed that aggregate, the stop-loss carrier pays the excess.
Question 7: The primary reason a healthcare organization would choose an occurrence-based professional liability policy over a claims-made policy is:
- Lower upfront premiums in the first policy year
- Coverage applies to any incident that occurs during the policy period regardless of when the claim is reported (Correct answer)
- Occurrence policies do not require tail coverage
- Occurrence policies provide higher per-incident limits
Correct answer: Coverage applies to any incident that occurs during the policy period regardless of when the claim is reported
Occurrence policies trigger based on when the incident happens, eliminating the need to purchase tail coverage when the policy is cancelled or non-renewed.
CPHRM Risk Financing 2
Which risk financing option provides the greatest potential cost savings to a healthcare organization with consistently favorable loss experience?