Midterm 1

Question 1

Which type of risk is insurable?

Select one:

a. Speculative risk
b. Gambling risk
c. Pure risk
d. Business risk

Answer 1

c. Pure risk

Question 2

Which of the following is an example of direct property loss?

Select one:

a. An outdoor rubbish fire spreads to a neighbour’s shed
b. A pipe breaks and floods a basement
c. A customer slips and falls on spilled food in a restaurant
d. A business is closed for six weeks after a fire on its premises.

Answer 2

b. A pipe breaks and floods a basement

Question 3

Multiple past losses are an example of what?

Select one:

a. Moral hazard
b. Physical hazard
c. Peril
d. Risk

Answer 3

a. Moral hazard

Question 4

General insurance includes

Select one:

a. Life and health insurance
b. Property and casualty insurance
c. Life, fire and auto insurance
d. Social, property and liability insurance

Answer 4

b. Property and casualty insurance

Question 5

Insurance that covers the peril of negligence is known as

Select one:

a. Property insurance
b. Personal injury insurance
c. Liability insurance
d. Surety bonds

Answer 5

c. Liability insurance

Question 6

Insurance company income comes from

Select one:

a. Investment income and reserves
b. Premiums and investment income
c. Reserves
d. Premiums and government subsidies

Answer 6

b. Premiums and investment income

Question 7

An insurance company that is owned by its policyholders is known as a

Select one:

a. Captive
b. Reinsurer
c. Co-operative
d. Stock company

Answer 7

c. Co-operative

Question 8

Which operational departments are unique to an insurance company?

Select one:

a. Accounting, finance, administration and marketing
b. Actuarial, claims, and underwriting
c. Investments, claims and administration
d. Human resources, information technology, and branch operations

Answer 8

b. Actuarial, claims, and underwriting

Question 9

Reinsurance that is applied to a whole class of risks is known as

Select one:

a. Treaty reinsurance
b. Facultative reinsurance
c. Pro-rata reinsurance
d. Excess of loss reinsurance

Answer 9

a. Treaty reinsurance

Question 10

Insurance premiums collected by a broker

Select one:

a. Belong to the broker until remitted monthly to the insurer
b. Must be remitted in full, immediately to the insurer
c. Must be held in trust until remitted to the insurer
d. Must be placed in an interest-bearing operating account by the broker

Answer 10

c. Must be held in trust until remitted to the insurer \

Question 11

The regulation of insurance intermediaries falls under

Select one:

a. The Office of the Superintendent of Financial Institutions (OSFI)
b. Federal jurisdiction
c. Provincial jurisdiction
d. The Insurance Companies Act

Answer 11

c. Provincial jurisdiction Correct

Question 12

The Office of the Superintendent of Financial Institutions (OSFI) is not responsible for

Select one:

a. Issuing the Order of Commencement for new insurance companies permitted to carry on business in Canada.
b. Auditing the financial statements of insurance companies conducting business in Canada.
c. Conducting annual inspections of the offices of insurance companies.
d. Approving the activities of foreign insurance companies wishing to conduct business in Canada.

Answer 12

b. Auditing the financial statements of insurance companies conducting business in Canada.

Question 13

The purpose of general conditions which are stated in the Civil Code of Quebec is to

Select one:

a. Establish certain rights and obligations for both insured and the insurer
b. Establish the criteria for licensing provincial insurers
c. Act as a skeleton document setting out the conceptual framework of a statutory objective
d. Prescribe the details that give shape to the concept of a statute

Answer 13

a. Establish certain rights and obligations for both insured and the insurer

Question 14

Under Quebec Civil Code, in certain cases when a minor acts without the assistance of their tutor (legal guardian) a contract may be nullified a result of

Select one:

a. Error
b. Fraud
c. Lesion
d. Misrepresentation

Answer 14

c. Lesion

Question 15

A valued insurance contract

Select one:

a. Implies that, because of a higher premium the contract is a valued one.
b. States that the amount to be paid in the event of a loss is determined when the policy is written.
c. Is a life insurance policy for an agreed amount
d. Is a replacement cost contract.

Answer 15

b. States that the amount to be paid in the event of a loss is determined when the policy is written.

Question 16

Under the Civil Code of Quebec, the four requirements of a valid contract are

Select one:

a. Acceptance, agreement, capacity and cause
b. Acceptance, cause, consent, and mutual agreement
c. Capacity, cause, consent, and object of contract
d. Capacity , consideration, co-operation and lesion

Answer 16

c. Capacity, cause, consent, and object of contract

Question 17

The actual cash value (ACV) of an item that has been lost or destroyed, can be described as the
Select one:
a. Original purchase price less depreciation based on a standard table
b. Replacement cost of the item at the time of loss
c. Value of an equivalent item of the same age and condition, subject to the same wear and tear.
d. Blue book value of an automobile.

Answer 17

c. Value of an equivalent item of the same age and condition, subject to the same wear and tear.

Question 18

A contract of compensation

Select one:

a. Is the equivalent of a contract of indemnity
b. States that a pre-set amount is payable when an event occurs
c. States that an amount is predicated on the values at the time of the loss
d. States that an employee is entitled to compensation if injured

Answer 18

b. States that a pre-set amount is payable when an event occurs

Question 19

Pure premium is

Select one:

a. The amount of the premium that is refundable when a policy is cancelled.
b. That part of the premiums that is required to pay the losses that have occurred.
c. The rate or unit of premium required.
d. The premium required to pay the anticipated losses.

Answer 19

b. That part of the premiums that is required to pay the losses that have occurred.

Question 20

The price of a unit of insurance for a period of one year is called

Select one:

a. Premium
b. Rate
c. Credit
d. Loading

Answer 20

b. Rate

Question 21

Discuss how a risk manager may finance risk, and provide two (2) examples of risk financing. (4 MARKS)

Answer 21

A risk manager may recommend an organization finance risk by self- funding. This would include

paying out of expenses,

setting up an account designated for losses (unfunded reserve),

setting aside funds to pay for losses (funded reserves),

borrow money, or

operate its own captive.

Examples- Fatima’s Fashions Inc has a retail store. When inventory in a warehouse is damaged by a water leak, the losses are covered out of a funded reserve, or savings account set aside for such contingencies.

Sunshine Cedar Inc builds gazebos and fences and ships them all over the world. As a large organization they have formed a captive insurance company to pay for property or liability losses.

Also buying insurance is a way to fund risk…

Question 22

The main function of insurance is spread of risk. Describe three (3) methods used by insurers to ensure they achieve a good spread of risk. (3 MARKS)

Answer 22

1. Volume - the insurer insures a large number of risks to maximize the size of the pool of funds.
2. Diversity of type of risks - the insurer offers a variety of insurance products over a variety of classes of insurance, so that if one line is unprofitable, it is likely that other more profitable lines will offset the losses.
3. Diversity of location - the insurer will avoid a high concentration of risks in a few geographical areas. Too many risks in one area could be subject to a single catastrophic event.

Reinsurance is a tool that may be used to help spread the risks.

Question 23

Outline two (2) methods of reinsuring risk, and two types of reinsurance. (4 MARKS)

Answer 23

Proportional (or pro-rata) reinsurance involves the insurer sharing a percentage of a risk with a reinsurer, with the reinsurer receiving the same proportion of the premium paid. E.g., Insurer cedes 50% of the loss, and pays 50% of the premium to the reinsurer.

In non-proportional (or excess of loss) reinsurance, the amount of loss is specified as the loss in excess of a stated threshold which the insurer retains. The amount of premium is negotiated with the reinsurer. E.g., Insurer cedes losses in excess of $1 million to the reinsurer, and pays 20% of the premium.

Treaty reinsurance involves the insurer ceding part of an entire class of business to the reinsurer. E.g., part of all “product liability” risk may be ceded.

Facultative reinsurance is when the insurer obtains reinsurance on a case by case basis, for specific policies only. E.g., part of the liability coverage for an oil well is ceded to a reinsurer.

Question 24

Compare and contrast the three (3) types of intermediaries insurers may use to get their products to consumers. (6 MARKS)

Answer 24

Exclusive agents
work for only one insurer
self employed business people 
paid by commission 
pay their own expenses 
client list belongs to the insurer
Independent broker 
works for the customers
has agreements in place with more than one insurer 
self employed business people 
paid by commission
pay their own expenses
client list belongs to the broker 
direct writer 
uses employees to sell policies 
employees receive wages and may get bonuses 
insurer pays all expenses 
client list belongs to the insurer

Question 25

Describe the steps that must be taken to respond to a privacy breach. (4 MARKS)

Answer 25

Contain the breach and assess opportunities to reduce harm
Evaluate the risks associated with the breach - what potential harm could result? How serious is the breach?
Determine who needs to be notified of the breach and send notice. Internal and external notification may include the customer whose information was breached.
Plan to prevent future breaches. Determine the cause and take preventative steps.

Question 26

One of the basic elements of a legal contract is agreement. Discuss the requirement for offer and acceptance in relation to the following points:

Communication
Acceptance of an offer
Counter offer
Lapsing or revocation of an offer

(8 MARKS)

Answer 26

Communication - an offer must be communicated, either in writing, email, verbal, phone, or combination of methods.

Acceptance - the acceptance must be definite and complete, with no changes. It must also be communicated in a method as noted above. It may also be accepted by actions such as a show of hands, handshake or some other gesture.

Counter offer - if the acceptance is not complete, but partial or makes a change to any condition of the original offer it is not an acceptance, but a counter offer. It is then up to the original offerror to accept, decline or make another counter offer.

Lapse or revocation of offer. Once accepted, the offer cannot be revoked (withdrawn). It can be revoked anytime prior to communication of acceptance.

If an offer is not accepted within the stated period of time, it is considered to have lapsed, making it no longer possible to accept. If no time period is stated, a “reasonable” time period is considered to apply. This may be subject to dispute….

Question 27

In addition to the five essential elements of a valid contract, there are THREE (3) additional principles that apply to insurance contracts. Name these principles and provide a brief explanation of each. (6 MARKS)

Answer 27

Insurable interest - the insured must have an insurable interest in the property or the risk being insured. Must be in a position to be prejudiced financially if property is damaged or destroyed, must be legally responsible for damages if negligence results in injury to others or damage to their property, or must have a relationship with the subject of life insurance.

Indemnity - the insurer will seek to put the insured back in the same financial position they were in before a loss. They are not entitled to gain from the loss. The principles of salvage, subrogation, and contribution ensure a gain does not occur.

Utmost good faith - the insurer is reliant on the insured to accurately and fully represent the conditions of a risk as the insured has superior knowledge of the risk. They must not misrepresent, conceal or fail to disclose material facts, those facts that the underwriter may rely on in accepting the risk or pricing the policy.

Question 28

In order to price insurance, actuaries use data on past losses to predict the losses an insurer will incur in the coming year. Explain how loss probability is influenced by the law of large numbers? (2 MARKS)

Answer 28

The law of large numbers states that the degree of uncertainty is reduced as the number of events increases. Actuaries use data to predict future losses. The accuracy of the predictions will improve as the size of the sample data used increases.

Question 29

Describe the three factors that may influence the reliability of loss predictions by actuaries. (6 MARKS)

Answer 29

Size of the sample - the larger the sample the higher the accuracy (see law of large numbers) If the actuary has data on fire losses for 10,000 houses, it will provide better predictions than if he has data on only 1,000 houses.

Period over which the sample was taken - If the sample is taken over a longer period of time, it will result in more accurate predictions than over a shorter period. 10 years of data or more is better than 5 years of data.

Conditions in the past relative to future conditions - If there are no significant changes to conditions that may affect the risk, the predictions will be more accurate than if there are significant changes. E.g., climate change has resulted in increased forest fires and flooding, making catastrophes more frequent, and accurate loss predictions more challenging.

Question 30

After an underwriter has accepted a risk is acceptable, the next step is to determine the cost to insure it. Demonstrate how an underwriter calculates the final premium paid by the insured. (2 MARKS)

Answer 30

If the rate is based on cents per $100, then:

Amount of insurance / 100 x rate = premium.

There may be additional loadings if the risk is considered to be higher than average.

There may be credits if the risk is lower than average, e.g., loyalty discount, seniors discount, claims free discount.

Question 31

You are an insurance broker.

A new client, Sue has a riding stable. She boards horses in her large heritage barn, and provides riding lessons to riders of all ages. She also hosts competitions and horse shows in an indoor stadium.

      Describe how you as the broker would best deal with Sue's application.   (5 MARKS)

Answer 31

Study 7 - Get a written application, which is preferable to a verbal application.

There is less chance of missing an important piece of information, and
less chance of error or dispute.
the insurer may require it
Reduce delays by getting all of the information at once.
Questions will include Named insured; policy term; subject of insurance; Loss payees; Loss history; prior insurance; brokers report; signatures.
Other answers may also be considered…

Question 32

You are an insurance broker. A new client, Sue has a riding stable. She boards horses in her large heritage barn, and provides riding lessons to riders of all ages. She also hosts competitions and horse shows in an indoor stadium.

You have submitted Sue’s application to the underwriter at Great West Farm insurance.
What are the underwriter’s options regarding this risk?
Discuss what the underwriter needs to consider in deciding how to deal with this risk. (5 MARKS)

Answer 32

The underwriter has to determine

whether or not to accept the risk,
or if they will accept it subject to certain conditions.
May deny coverage if it appears to be likely to have a loss, is substandard, or if it is a class of risk the insurer doesn’t cover.
To make the decision, the underwriter will consider information about the applicant, in particular

if there are any indicators of a moral hazard.
past claims history including questionable, exaggerated, denied claims
Poor financial position indicated by excessive liens against the property.
Bad credit rating could indicate financial mismanagement.
Past difficulty in obtaining insurance or having insurance cancelled for non-payment of premiums.
He will consider the physical hazards and exposures of the risk under consideration,

age and condition of the premises
adjacency to hazards in the area
concentration in the area based on other properties insured by the insurer
and also whether there are any special factors pertaining to the class of risk or type of insurance.

Licensing, building codes, certification of workers for the industry.

Question 33

You are an insurance broker. A new client, Sue has a riding stable. She boards horses in her large heritage barn, and provides riding lessons to riders of all ages. She also hosts competitions and horse shows in an indoor stadium.

Sue has not revealed in her application that she has rented out some of her space next to the barn to a farrier/blacksmith. Explain how this fact could affect her insurance coverage.

Answer 33

Sue has the duty of utmost good faith.
Also known as uberrima fidea.
She is required to disclose all material facts, those facts that may influence the decision of the underwriter in accepting or pricing the risk.
Non-disclosure is failure to speak when he has a duty to speak.
A farrier blacksmith increases the risk of fire loss and therefore is a material fact.
The insurer has the right to void the policy or charge an additional premium.
Even if the tenant came after the policy was purchased, it is material to the risk and must be disclosed to the insurer.
If there is a loss due to the blacksmith, it may not be covered.
Sue could be found in breach of his policy and as a result not have access to her coverage.