RIMS Risk Financing & Transfer Strategies 1 — Questions and Answers
Question 1: Which risk financing strategy involves an organization retaining financial responsibility for losses rather than transferring them to an insurer?
- Risk transfer
- Risk retention (Correct answer)
- Risk avoidance
- Risk sharing
Correct answer: Risk retention
Risk retention means the organization absorbs losses internally, either deliberately (active retention) or by default (passive retention).
Question 2: A captive insurance company is best described as:
- A government-sponsored reinsurer for catastrophic losses
- A licensed insurer wholly owned by the insured to fund its own risks (Correct answer)
- An independent insurer that specializes in high-risk industries
- A pooling arrangement among unrelated companies in the same industry
Correct answer: A licensed insurer wholly owned by the insured to fund its own risks
A captive is a licensed insurance subsidiary created and controlled by its parent organization to finance the parent's own risks.
Question 3: Under a retrospective rating plan, the final insurance premium is determined by:
- The insurer's investment income during the policy period
- The insured's actual loss experience during the policy period (Correct answer)
- Industry-wide loss statistics for the coverage class
- Actuarial projections made at policy inception
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 insured's own actual losses, subject to minimum and maximum premium caps.
Question 4: Which of the following is the PRIMARY advantage of a large deductible program over a guaranteed-cost insurance policy?
- Eliminates the need for risk management staff
- Provides broader coverage with no sublimits
- Allows the insured to retain investment income on funds held for losses (Correct answer)
- Transfers all catastrophic risk to the insurer at lower cost
Correct answer: Allows the insured to retain investment income on funds held for losses
Under a large deductible program the insured retains funds until losses are paid, earning investment income on those reserves that would otherwise go to the insurer.
Question 5: A risk retention group (RRG) under the federal Liability Risk Retention Act of 1986 must be:
- Owned by a single corporation with multiple subsidiaries
- Composed of members engaged in similar or related business activities (Correct answer)
- Licensed in every state where it writes coverage
- Reinsured by a domestic admitted carrier in each state
Correct answer: Composed of members engaged in similar or related business activities
RRGs must be owned and controlled by their members, who must be engaged in similar or related businesses, allowing them to pool liability exposures.
Question 6: In a finite risk insurance program, the primary distinguishing feature compared to traditional insurance is:
- Unlimited policy limits backed by a government guarantee fund
- Limited risk transfer combined with a significant timing or investment risk element (Correct answer)
- Coverage only for natural catastrophe perils excluded by standard policies
- Mandatory use of a captive fronting arrangement
Correct answer: Limited risk transfer combined with a significant timing or investment risk element
Finite risk programs blend limited underwriting risk transfer with timing and investment risk, smoothing an organization's loss costs over multiple years.
Question 7: Which of the following statements BEST describes a loss-sensitive insurance program?
- Premiums are fixed at inception and never adjusted regardless of losses
- The insured's premium varies based on its own actual loss experience (Correct answer)
- Coverage attaches only when aggregate losses exceed a predetermined threshold
- The program covers only losses that are uninsurable in the standard market
Correct answer: The insured's premium varies based on its own actual loss experience
Loss-sensitive programs (such as retrospective rating or paid-loss plans) link the insured's premium directly to its own loss outcomes.
RIMS Risk Financing & Transfer Strategies 1
Which risk financing strategy involves an organization retaining financial responsibility for losses rather than transferring them to an insurer?