Fundamentals of Insurance (BC) - Self-Examination Chapter Questions and correct answers

What is the major function of insurance? - ANSWERS To allow the spread of risk. Define "Spread of Risk" - ANSWERS "The losses of the few are shared among the many" What are the 4 other functions of insurance? - ANSWERS 1. Basis of Credit System 2. Eliminates worry - Encourages Entrepreneurship 3. Loss Prevention and Loss Reduction 4. Source of Employment and Investment Capital What are the 3 types of property and casuality (general) insurance? - ANSWERS 1. Automobile 2. Property 3. Liability What are the 2 types of insurer organizations? (including the 2 subtypes) - ANSWERS 1. Private Insurers - Stock Companies - Mutual Companies 2. Government Insurers How do stock companies work? - ANSWERS The money to operate a stock company may come from private funds or via a public sale of stock. Ownership rests in the hand's of the company's shareholders whose main purpose is to derive profit from their investment. How do mutual companies work? - ANSWERS A mutual company is a corporation owned by its policy holders. The creation of profit is not a primary incentive. Instead, the main goal is to provide policyholders with insurance at as low a cost as possible. When the company makes money it's refunded to the policy holders via dividends or rate adjustments. Which insurance are government insurers most involved in? - ANSWERS Federal and provincial governments are involved in medical insurance, employment insurance and workers' compensation. In BC, Saskatchewan, Manitoba and Quebec the government provides compulsory auto insurance. What are 2 ways insurers use to sell their products? - ANSWERS 1. Direct Writing System 2. Independent Brokerage System How does the Direct Writing System work? - ANSWERS - In the direct writing system, the producers are employees of the insurer and are limited to selling only products of the insurer. - Remuneration may be via salary or commission basis or a combination - Insurer owns all business and performs administrative functions - Examples of direct writers include: Belair, RBC Insurance, and Desjardin How does the Independent Brokerage System work? - ANSWERS - Brokerage owners are NOT employees of insurers and in most cases choose to represent more than 1 insurance company as well as the facility association. - The brokerage owns the business it produces and is responsible for providing policyholders with several client services. - The brokerage is paid a commission by the insurer on all the business it writes which is then used to pay salaries, rent, postage and other operating expenses. How does the agency system work? - ANSWERS - Agents are distinct from brokers and direct writers as they are small business owners. - Like direct writers, they represent 1 insurer and the Facility Association. - Agents are paid commission and bonuses for the business they sell and the agents themselves have ownership in their book of business. - Examples of agent companies are Desjardin and Cooperators General Insurance Company. Define Risk. - ANSWERS Risk is "the chance of financial loss to which the object of insurance may be exposed" Define Peril. - ANSWERS Peril is simply defined as "the cause of loss" - Examples can include and are not limited to: fire, wind, hail, etc. Of the 2 distribution methods, which is most common? - ANSWERS The majority of insurance business in Canada is transacted by private insurers. What are 3 major categories of insurance needs? - ANSWERS 1. Personal Risk 2. Property Risk 3. Liability Risk What are the 4 options an insured may use when dealing with risk? - ANSWERS 1. Avoidance of Risk 2. Controlling of Risk 3. Retention of Risk 4. Transfer of Risk Which method of dealing with risk the LEAST practical? - ANSWERS Avoidance of risk What are the 2 types of risk? And which of them is insurable? - ANSWERS 1. Speculative risk 2. Pure risk - Only pure risk is insurable. Describe Pure Risk. - ANSWERS Pure risk involves the chance of financial loss with no chance of financial gain. When there is no opportunity for a person to profit from a loss, the risk is pure. Only pure risk is insurable. Describe Speculative Risk. - ANSWERS Speculative risk involves the possibility of financial loss or gain. What are the 5 elements required to be present in all contracts? - ANSWERS 1. Agreement 2. Consideration 3. Legality of Object 4. Legal Capacity of the Parties to Contract 5. Genuine Intention What are 3 elements of a contract, that are unique to insurance contracts which must be present if an insurance contract is to be enforceable at law. - ANSWERS 1. Insurance Interest 2. Utmost Good Faith 3. Indemnity Define "bind" - ANSWERS In insurance, to "bind" means that the broker has committed the insurer to provide a contract of insurance on the subject matter under discussion. What are 3 types of insurance forms used by insurers to make changes to an existing policy? - ANSWERS 1. Endorsement or Riders 2. Floaters 3. Separate Policies Explain what an endorsement does. - ANSWERS An endorsement or rider acknowledges a change in the terms of the contract. Explain what Floaters are. - ANSWERS A floater is used to provide coverage for property having a high degree of mobility. The terms floater and rider are used interchangeably. Explain why separate policies may be required. - ANSWERS Sometimes a separate policy is required in order to provide addition coverages needed by the insureds. In these cases, there is no actual change to the original contract. - For example, the Butler's commercial property insurance covers the office building they own, but it does not cover Mr. Butler's professional liability for errors and omissions he might make as an accountant. He would need a separate policy for errors and omission insurance. Define Agreement. - ANSWERS Agreement is said to exist where an unconditional acceptance of an offer has been made. Define Consideration. - ANSWERS Consideration is an exchange of something in value between the parties. Define Legality of Object - ANSWERS When a contract insures property which is stolen, "Legality of Object" is said not to be present Define Legal Capacity - ANSWERS Persons considered to be competent to contract are said to have "legal capacity". - A minor does not have legal capacity to contract (Except for food, clothing and lodging) Define Genuine Intention. - ANSWERS Genuine Intention is present when it can be shown the contract was not affected by fraud, duress, concealment or mistake. Define Insurable Interest. - ANSWERS People who are able to show that they would suffer financially by a loss are said to have "insurable interest" Define Utmost Good Faith. - ANSWERS "Utmost Good Faith" is breached when an applicant for insurance deliberately withholds information about previous claims, cancellations, or refusals of insurance. Define Indemnity. - ANSWERS A part of all insurance contracts which attempts to provide insureds with the actual amount of their loss, no more and no less. Which is the most popular and most practical means of dealing with risk? - ANSWERS Transfer of Risk via Insurance. In the event that a contract is missing 1 or more of the 8 essential elements of a contract, the contract may be considered: - ANSWERS - Void: A void contract is a contract that is considered never to have existed - Voidable: A contract which is void as to the wrongdoer, but not void as to the wronged party, unless the wronged party elects to treat it as such. Describe Avoidance of Risk. - ANSWERS Avoidance of risk means that all chance of financial loss has been eliminated. For example, the Butlers' own a furniture store. If they were to sell the store completely, they would avoid any risk of loss