ARM 56 – Risk Financing Exam Review Session RIMS 2014 – Denver, CO

1. ARM 56 – Risk Financing • Exam Review Session • RIMS 2014 – Denver, CO • Presented By: • Rich Berthelsen, JD, MBA, CPCU, AIC, ARe, AU, ARM • Senior Director of Content Development • The Institutes • 610-644-2100, ext. 7995

2. Overview • Exam Basics – What to Expect • Test-Taking Tips • Review of Sections Students Find Most Challenging

3. What to Expect on the Exam • Educational Objectives • Balanced Exam • Pretest Items

4. Test-Taking Tips • Time • Get the easy ones • Don’t get bogged down early • Use the “mark for later review” feature • Eliminate the obviously wrong answers • Use your scratch paper to keep track

6. Assignment 2 – Estimating Hazard Risk

7. Steps in Estimating Hazard Losses • 1st Collect and organize data • 2nd Limit individual losses • 3rd Apply loss development factors • 4th Forecast losses

8. Exposure Data • Exposure unit defined: • A fundamental measure of the loss exposure assumed by the insurer. • Examples: manufacturers – sales • apartments – square footage • retail stores - ?

16. Steps in Applying Increased Limit Factors • 1st Develop increased limit factors • 2nd Calculate the increased limit factor for each layer of losses • 3rd Forecasting losses at various loss limits

18. Increased limit factor for range from $50,000 to $1 million is: • 2.50 divided by 1.20 which equals 2.08

25. Assignment 5 – Retrospective Rating Plans

26. Retrospective Rating Plan • A rating plan that adjusts the insured’s premium for the current policy period based on the insured’s loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.

27. Retrospective Rating Premium Formula • Retrospective rating plan premium = • (Basic premium + Converted losses + Excess loss premium) x Tax multiplier

28. Converted Losses • An element of the retrospective rating formula that includes the actual losses incurred increased by a factor (loss conversion factor) that reflects loss adjustment expenses.

29. Loss Conversion Factor • A factor applied to incurred losses so that the converted losses reflect unallocated loss adjustment expenses (ULAE)

31. Formula for Converted Losses • Converted losses = Loss conversion factor x Incurred losses

32. Excess Loss Premium • An element of the retrospective rating plan formula that compensates the insurer for the risk that an individual loss will exceed the loss limit.

33. Loss Limit • The level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium.

34. Formula for Excess Loss Premium • Excess loss premium = Standard premium x Excess loss premium factor x Loss conversion factor

35. Formula to Review in Preparation for Case Study • Retrospective rating plan premium = • (Basic premium + Converted losses + Excess loss premium) x Tax multiplier

37. Paid Loss Retrospective Rating Plan • A retrospective rating plan in which the insured pays a deposit premium at the beginning of the policy period and makes additional payments, usually monthly, to reimburse the insurer for the insured’s losses as they are paid.

40. Assignment 6 - Reinsurance

41. Reinsurance • The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences covered by the primary’s insurance policies.

42. Reinsurance Transactions • No single reinsurance agreement performs all the reinsurance functions. A primary insurer often combines several reinsurance agreements. There are 2 types of reinsurance transactions: treaty and facultative.

44. Facultative Reinsurance • Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposure submitted

47. Per Occurrence Excess of Loss • A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer’s policies.

48. Attachment Point • The dollar amount above which the reinsurer responds to losses.

50. Pro Rata Reinsurance • A type of reinsurance in which the primary insurer and reinsurer proportionally share the amounts of insurance, policy premiums, and losses (including LAE).