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Quizzes > Quizzes for Business > Finance

Take the Captive Insurance Savings Quiz

Assess Your Captive Insurance Savings Strategies Today

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting a trivia quiz on captive insurance savings

Ready to dive into risk management and cost optimization? The Captive Insurance Savings Quiz is perfect for finance professionals and insurance students aiming to test their captive insurance insights. In just minutes, participants can evaluate their understanding and identify improvement areas - ideal after tackling the Insurance Knowledge Quiz or the Insurance Fundamentals Quiz. Best of all, this quiz is fully customizable in our editor to match your learning goals. Explore more quizzes and continue sharpening your expertise.

What is a captive insurance company?
An entity created by insureds to underwrite their own risks
A government-run risk pool
A traditional commercial insurance provider
A specialized reinsurer for large corporations
A captive insurance company is formed and owned by its insureds to underwrite their risks directly. This structure aligns underwriting results with the parent organization's risk management goals.
Which component is a primary driver of captive insurance savings?
Increased brokerage commissions
Guaranteed investment returns of 8%
Underwriting profit that accrues to the parent
Mandatory dividend distributions to policyholders
Captive owners benefit directly from underwriting profits that would otherwise go to commercial insurers. Retaining those profits reduces overall insurance costs.
Which of the following is a financial benefit of captive insurance structures?
Guaranteed zero loss experience
Eliminated policyholder responsibilities
Enhanced cash flow from controlled premium payments
Unconditional capital reimbursements
Captives enable parent companies to time premium payments and invest funds held in reserves, improving their cash flow. This controlled premium payment schedule is a common financial benefit.
Which basic risk management strategy is employed within captive insurance?
Outsourcing risk management to brokers
Pooling similar risks across affiliated entities
Avoiding all high-severity risks
Assuming unlimited third-party liabilities
Captives often pool the similar risks of related entities to achieve diversification and more predictable loss experience. This internal risk pooling is a cornerstone of captive risk management.
How do captives typically achieve tax savings for their owners?
Receiving tax credits for claim payments
Deducting insurance premiums paid to the captive
Exempting all investment income from taxes
Shifting corporate tax to reinsurers
Captive premiums are often deductible by the parent company as a business expense, reducing taxable income. The captive itself may defer or reduce taxes on underwriting gains under certain conditions.
What distinguishes a Section 831(b) captive election?
A reinsurance vehicle that pools global risks
A small captive electing exemption from federal income tax on underwriting profits
A cell captive with multiple segregated accounts
A captive that only writes employer liability coverage
Under Section 831(b), eligible small captives can elect to be exempt from federal income tax on underwriting income below a statutory premium threshold. This provides significant tax deferral opportunities.
How is the combined ratio in captive underwriting calculated?
Ratio of reinsurance cessions to net premiums
Percentage of premiums allocated to dividends
Sum of loss and expense ratios indicating profitability
Calculation of investment yield on reserves
The combined ratio is the sum of the loss ratio and expense ratio and indicates whether underwriting generates profit. A combined ratio below 100% signals an underwriting profit.
Which advantage is specific to a group captive compared to a single-parent captive?
Guaranteed higher reinsurance rates
Exclusive control by a single parent company
Shared risk and capital among multiple participants
Eliminated regulatory reporting requirements
Group captives allow multiple members to pool and share risk and capital requirements, enhancing diversification. Single-parent captives rely solely on the risks and capital of one sponsor.
How does reinsurance to the capital markets optimize a captive program?
By securitizing risk and accessing insurance-linked securities markets
By mandating higher deductibles for parent company
By outsourcing all claims handling overseas
By increasing direct premiums to third-party insurers
Transferring risk to the capital markets via insurance-linked securities allows captives to diversify funding sources and reduce reinsurance costs. This securitization aligns risk with institutional investors.
Which metric best indicates captive underwriting success?
A loss ratio above 100% indicating strong reserve adequacy
A retention ratio exceeding 150%
A combined ratio below 100% indicating underwriting profit
A collateral ratio of 80%
A combined ratio below 100% shows that premiums collected exceed losses and expenses, signaling underwriting profit. This is a core performance indicator for captives.
What is a critical regulatory requirement for an onshore captive insurer?
Limiting annual premiums to less than $1M
Requiring all board members to be government officials
Maintaining approved minimum capital and surplus levels
Mandating a specific investment in government bonds
Onshore captives must meet the domicile's prescribed minimum capital and surplus requirements to ensure solvency. This regulatory capital supports policyholder obligations.
What is the primary purpose of a feasibility study for a proposed captive?
To guarantee tax exemptions for the captive
To assess economic viability and quantify potential savings
To set compulsory reinsurance treaties
To regulate the captive's claims approval process
A feasibility study evaluates expected losses, expenses, capital needs, and tax implications to determine if setting up a captive is cost-effective. It quantifies potential savings and risks.
How can a captive insurer enhance claims management efficiency?
Delegating all claims decisions to reinsurers
Outsourcing claims to unrelated third-party brokers
Centralizing and customizing claims administration procedures
Eliminating reserve requirements for claims
By managing claims in-house or through a dedicated captive administrator, sponsors can tailor processes, control costs, and improve loss outcomes. Centralized claims handling enhances data accuracy.
Which function falls under the governance role of a captive board of directors?
Negotiating reinsurance contracts directly with policyholders
Setting underwriting guidelines and approving the business plan
Acting as primary claims adjusters
Selling surplus lines policies to unrelated parties
The captive board oversees strategy, approves underwriting policies, and endorses business plans. This governance ensures alignment with the parent's risk and financial objectives.
What feature defines a cell captive structure?
A traditional group reinsurance treaty
Single monolithic carrier for one parent only
Unregulated offshore risk pool
Segregated accounts isolating each participant's liabilities
A cell captive consists of a core and multiple cells, each with segregated assets and liabilities for different participants. This structure allows flexibility and reduces cross-liability risk.
A captive has an expected loss ratio of 60% and an expense ratio of 30%. What premium, as a percentage of exposure, is required to break even on underwriting?
100%
85.7%
75%
90%
To break even, expected losses plus expenses must equal premium. Solving 0.6P + 0.3P = P gives P = 60% / (1 - 0.3) = 85.7%.
Under Section 831(b), what is the maximum annual written premium a captive can have to qualify for tax exemption on underwriting income?
$5,000,000
$10,000,000
$2,300,000
$1,200,000
Section 831(b) allows qualifying captives to elect tax exemption if annual written premiums do not exceed $2.3 million. This threshold is adjusted periodically for inflation.
Which method do actuaries typically use to determine optimal retention levels in a captive?
Monte Carlo simulation of loss distributions
Fixed deductibles mandated by regulators
Historical average claim count only
Annual survey of competitor premiums
Monte Carlo simulations model a range of loss scenarios to identify retention levels that balance risk and capital efficiency. This stochastic approach provides robust decision support.
When selecting an optimal domicile for a new captive, which factor is most critical?
Local currency exchange rate volatility
Domicile's regulatory framework and political stability
Country's population size
Number of captive managers available locally
A domicile's regulatory environment and political stability directly affect licensing, capitalization, and ongoing compliance. These factors are primary considerations for captive sponsors.
To optimize both underwriting returns and investment income, which strategy should a captive adopt?
Matching premiums one-to-one with reinsurance contracts
Investing solely in high-yield equities
Offsetting underwriting risk through derivatives only
Asset-liability matching to secure reserve obligations
Asset-liability matching aligns investment durations and cash flows with expected claim payments, reducing liquidity risk. This approach balances underwriting needs with investment objectives.
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Learning Outcomes

  1. Identify key components of captive insurance savings
  2. Analyze financial benefits of captive insurance structures
  3. Evaluate risk management strategies within captives
  4. Apply tax and regulatory frameworks to captive savings
  5. Master optimization techniques for captive insurance programs

Cheat Sheet

  1. Understand core captive insurance components - Dive into the heart of captive insurance by exploring loss reserves and unearned premium reserves. These reserves act like your financial safety net, making sure you have funds ready when claims pop up. They're essential for keeping your captive stable and stress-free! accountinginsights.org
    2. accountinginsights.org
  2. Spot financial benefits of captives - Captive insurance can feel like a secret treasure chest, offering tax-deductible premiums and underwriting profits that stay in your pocket. This means potential cost savings and healthier cash flow compared to traditional insurance. It's a clever way to keep more money working for you! captivecoalition.com
    3. captivecoalition.com
  3. Evaluate risk management strategies - Good captives are built on rock-solid safety practices. By analyzing how effective risk mitigation drives down claims, you learn to keep insurance costs predictable and manageable. Over time, fewer surprises mean better budgeting and more peace of mind! captivecoalition.com
    4. captivecoalition.com
  4. Apply tax & regulatory frameworks - Section 831(b) of the Internal Revenue Code is your magic ticket if you qualify. It lets small captives be taxed only on investment income, which can unlock huge savings. Understanding this rule is key to designing a tax-efficient captive! en.wikipedia.org
    5. en.wikipedia.org
  5. Master optimization techniques - Learn how captives tap into reinsurance markets directly to cut costs and boost investment returns. This strategy can open doors to tax-efficient assets you wouldn't access otherwise. It's like giving your captive a supercharger for both protection and profit! fastercapital.com
    6. fastercapital.com
  6. Learn captive insurance structures - From pure captives to group captives, there's a flavor for every business size and risk appetite. Pure captives serve one company, while group captives share costs across multiple members. Picking the right structure is like choosing the perfect tool for the job! forc.org
    7. forc.org
  7. Understand regulatory requirements - Jurisdictions set the rules on capital, reporting and taxes, so you need to know the score before you play. Requirements can vary wildly, so a little homework goes a long way. Mastering these regulations ensures your captive stays in good standing! forc.org
    8. forc.org
  8. Explore captive investment strategies - Balancing risk and return is like walking a tightrope, but captives do it with flair. You'll learn how to keep cash liquid for claims while chasing growth in compliant ways. Smart investments help your captive flourish without overstepping regulatory bounds! accountinginsights.org
    9. accountinginsights.org
  9. Analyze captive disadvantages - Every hero has a weakness: captives can face underinsurance, overhead costs, and compliance hurdles. Spotting these pitfalls early helps you build stronger defenses. A balanced view means you're ready for both upsides and challenges! investopedia.com
    10. investopedia.com
  10. Examine real-world captive examples - Peek behind the curtains at Fortune 500 captives to see how industry giants manage risks. Their success stories teach you practical applications and best practices. Learning from the pros is the fastest route to captive mastery! investopedia.com
    11. investopedia.com
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