Risk Financing Achievement of the least-cost coverage of an organization's loss exposures, while ensuring post-loss financial resource availability. The risk financing process consists of five steps: identifying and analyzing exposures analyzing alternative risk financing techniques selecting the best risk financing technique(s) implementing the selected technique(s) monitoring the selected technique(s)

Types of Losses Maximum Possible Loss Probable Maximum Loss The worst loss that could possibly occur because of a single event. Probable Maximum Loss A property loss control term referring to the maximum loss expected at a given location in the event of a fire at that location, expressed in dollars or as a percentage of total values.

Loss Sensitive Insurance Plans An insurance rating plan for which the final premium is dependent on the actual losses during the period the plan is in effect. This risk financing technique places upper limits on the insured's costs if its losses are high but also requires the payment of a minimum premium in the event it experiences low losses or is loss-free. Thus, the risk financing costs tend to vary based on actual loss experience. This type of plan provides an incentive for insureds to emphasize safety and loss control activities. Deductible plans, retrospective rating plans, dividend plans, and retention plans are all examples of loss sensitive plans.

Retrospective Premium Policies A retrospective premium policy, unlike a standard insurance policy, provides for retrospective determination of the policyholder’s premium obligations according to a  formula based on the cost of claims actually paid by the insurance company under the policy.  Retrospectively rated policies usually also contain “loss limitations.” A loss limitation modifies retrospective premium coverage by limiting the amount of a claim to be assessed to the policyholder for purposes of calculating the retrospective premium.  If, for example, the loss limitation is $100,000, and the claim amount is $125,000, only $100,000 gets passed through the formula. 

Reinsurance Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit the total loss the original insurer would experience in case of disaster. By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. One common example of reinsurance is known as a "cat policy," short for catastrophic excess reinsurance policy. This covers a specific limit of loss due to catastrophic circumstances, such as a hurricane, that would force the primary insurer to pay out significant sums of claims simultaneously. Unless there are other specific cash-call provisions, the reinsurer is not obligated to pay until after the original insurer pays claims on its own policies.

The Alternative Insurance Market Insurance Pools Captives  Risk Retention Groups

Insurance Pools An insurance pool is a multiple-member, risk-sharing arrangement where government organizations pool their funds together to finance an exposure, liability, risk or some combination of the three. Rather than purchasing insurance, employee benefit and risk management services share funds to procure services and insurance as a group through traditional insurance providers, pools and cooperatives.

Benefits of Insurance Pools Pricing stability: Pools can often purchase higher limits of insurance at a lower cost. Leverage: The power of group purchasing creates broader coverage and more favorable terms for members. Customization: Insurance pools offer member-driven services that include risk control, claims management and training. Innovation: Pools have developed unique coverage offerings. Ownership: Members own the pool, including any surplus/equity if losses are lower than expected. Flexibility: Pools respond to individual members’ needs through deductibles, varying SIR levels and special coverages. Control: Members are more involved in key decisions such as claims resolution, funding levels and services.

Insurance Captives A captive is an insurance company created and wholly owned by one or more non-insurance companies to insure the risks of its owner (or owners). Captives are essentially a form of self-insurance whereby the insurer is owned wholly by the insured. They are typically established to meet the risk-management needs of the owners or members. Captives are formed to cover a wide range of risks; practically every risk underwritten by a commercial insurer can be provided by a captive.

Offshore Insurance Captives A special purpose insurance company domiciled outside of the country where the insured risk is located. The motives for using an offshore captive may include tax planning. Regulatory differences between onshore and offshore have become significantly less as the offshore captive industry has matured. Offshore domiciles popularly used for North American source business include Barbados, Bermuda, British Virgin Islands, and Grand Caymans.

Risk Retention Group (RRG) An insurance company formed pursuant to the federal Risk Retention Act of 1981, which was amended in 1986 to allow insurers underwriting all types of liability risks except workers compensation to avoid cumbersome multistate licensing laws. An RRG must be owned by its insureds. Most RRGs are formed as captives and must be domiciled onshore, except for those grandfathered under the 1981 Act.

Claims Made Policies A claims-made policy covers claims made against an insured during the policy period. The injury that leads to the claim may take place before or during the policy period. Claims-made policies provide little or no coverage for claims made after the policy expires.

Occurrence Policies Under an occurrence policy, coverage is triggered (initiated) by an injury that takes place during the policy period. While the injury must occur during the policy term, a claim that results may be filed during or after the policy period. Most general liability policies are written on occurrence forms. The primary advantage of occurrence policies is that they cover "long- tail" claims, meaning claims that arise many years after the policy has expired.

Risk Retention Planned acceptance of losses by deductibles, deliberate noninsurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred.

Insurance Retention Insurance retention refers to the amount of money an insured person or business becomes responsible for in the event of a claim.

Deductibles Deductibles on insurance policies represent a common type of insurance retention.

Primary Insurance Insurance is considered primary whenever coverage begins after a written contract has been signed and a potential liability has been triggered by some event. For example, if you take out a fire insurance policy on your home or business, the primary coverage kicks in as soon as the insured property suffers fire damage. A primary insurance policy normally imposes a duty on the insurance carrier to protect against any claims made against the insured party, such as protecting a car driver who has been hit in an intersection by another car.

Excess Insurance In its most basic form, an excess liability policy extends the limit of insurance coverage to find an existing insurance coverage, otherwise known as the underlying liability policy. The underlying policy does not have to be primary insurance; it can be reinsurance or another excess policy in many circumstances. Excess insurance coverage is a topic of considerable confusion due to the many different uses of the term "excess" in the insurance industry. In fact, there have been some significant malpractice claims against insurance providers that used the term in a confusing or misleading manner.

Umbrella Policy A policy designed to provide protection against catastrophic losses. It generally is written over various primary liability policies, such as the business auto policy (BAP), commercial general liability (CGL) policy, watercraft and aircraft liability policies, and employers liability coverage. The umbrella policy serves three purposes: It provides excess limits when the limits of underlying liability policies are exhausted by the payment of claims; It drops down and picks up where the underlying policy leaves off when the aggregate limit of the underlying policy in question is exhausted by the payment of claims It provides protection against some claims not covered by the underlying policies, subject to the assumption by the named insured of a self-insured retention (SIR).