Which statement about finite risk insurance plans is correct?

Which statement about finite risk insurance plans is correct?

• A. The plan offers the most risk transfer
• B. The premium for a finite risk insurance plan is a very high percentage of the policy limits.
• C. They provide lower limits than guaranteed cost insurance
• D. It does not address the goal of complying with legal requirements.

Answer: (B)

Finite risk plans mix insurance protection with a pre-funded funding component. The insurer takes on a defined portion of risk, but a substantial part of the premium is dedicated to creating and funding a reserve that covers future losses. Because this reserve is built into the premium, the cost ends up being a very large percentage of the policy limits. This structure allows budgeting stability and risk financing over time, even though some risk remains with the insured through the self-insured retention and the funded reserve. The statement about the premium being a very high percentage of the limits best captures the defining feature of finite risk plans.

Finite risk plans mix insurance protection with a pre-funded funding component. The insurer takes on a defined portion of risk, but a substantial part of the premium is dedicated to creating and funding a reserve that covers future losses. Because this reserve is built into the premium, the cost ends up being a very large percentage of the policy limits. This structure allows budgeting stability and risk financing over time, even though some risk remains with the insured through the self-insured retention and the funded reserve. The statement about the premium being a very high percentage of the limits best captures the defining feature of finite risk plans.