Which statement is correct regarding how a large deductible plan compares with guaranteed cost in meeting the various risk financing goals?

Which statement is correct regarding how a large deductible plan compares with guaranteed cost in meeting the various risk financing goals?

• A. The level of liquidity that needs to be maintained is lower for a large deductible plan than guaranteed cost insurance.
• B. Cash flow uncertainty is better managed by a large deductible plan than by guaranteed cost insurance.
• C. A large deductible plan minimizes the cost of risk better than a guaranteed cost insurance.
• D. Complying with legal and regulatory requirements is more difficult with a large deductible plan than with guaranteed cost insurance.

Answer: (C)

In risk financing, how a plan shifts risk between the insurer and the insured directly affects the total cost of risk. A large deductible plan lowers the insurer’s exposure by requiring the insured to pay more of the first-dollar losses, so the insurance premium is much smaller. Even though you must fund the deductible and handle claims up to that amount, the overall expense to the firm for risk financing is typically reduced, making it the better option for minimizing cost of risk compared with guaranteed-cost insurance. The other statements don’t fit because a large deductible usually increases liquidity needs to fund the deductible, and it introduces more cash-flow variability since losses and the timing of funding can vary. Guaranteed-cost insurance, by contrast, offers more predictable cash outlays and doesn’t require the same level of internal funding for losses. Compliance with legal/regulatory requirements isn’t inherently harder with a large deductible; both structures meet coverages required by law, with the difference lying in cost and funding mechanics.

In risk financing, how a plan shifts risk between the insurer and the insured directly affects the total cost of risk. A large deductible plan lowers the insurer’s exposure by requiring the insured to pay more of the first-dollar losses, so the insurance premium is much smaller. Even though you must fund the deductible and handle claims up to that amount, the overall expense to the firm for risk financing is typically reduced, making it the better option for minimizing cost of risk compared with guaranteed-cost insurance.

The other statements don’t fit because a large deductible usually increases liquidity needs to fund the deductible, and it introduces more cash-flow variability since losses and the timing of funding can vary. Guaranteed-cost insurance, by contrast, offers more predictable cash outlays and doesn’t require the same level of internal funding for losses. Compliance with legal/regulatory requirements isn’t inherently harder with a large deductible; both structures meet coverages required by law, with the difference lying in cost and funding mechanics.