Question

provide one examle for the following (Foundation of Risk Management and Insurance)

1)Large Deductible Plan

2)Captive Insurers

3)Retrospective Rating Plan

4)Securitization

5)Hedging

Answer 1

1. Large Deductible Plan: A Large Deductible Plan is an insurance policy with per incidence or per accident deductible of $100,000 or more. Example of large deductible plan an insurer handles claims which guarantee the payment of all claims.
2. Captive Insurers: Captive Insurers is a subsidiary formed by parent company to insure their risk exposures. Therefore are two types of captive insurance pure captive and group captive. Example of captive insurer is forming captive insurance companies to handle the company’s insurance risks in-house.
3. Retrospective Rating Plan: Retrospective Rating Plan is a special insurance agreement used in risk financing plan where organization purchase insurance based on a rating formula which can be adjusted with the premium at the end of the policy period based on the organization's actual losses during that policy period. Example of retrospective rating plan liability insurance.
4. Securitization: Securitization is the process of making a marketable insurance linked security which is based on the cash flows from the transfer of insurable risks. Example of securitization is catastrophe bonds.
5. Hedging: Hedging is used to reduce the financial risk due to fluctuation in cost or price that can be mitigated by using hedging techniques so that increase in the cost can be offset by gaining through hedging. Example of hedging is Future contracts which are used for hedging interest rate risk where two parties inter into a contract to protect them from any fluctuations in price or interest rate.