C16 BUSINESS OF INSURANCE EXAM QUESTIONS WITH
COMPLETE SOLUTIONS GUARANTEED PASS BRAND NEW 2025
What are the fundamental principles of insurance?
1.- The premiums of the many are used to pay the losses of the few.
2.- The premium shall be commensurate with the risk
Explain the first principle of insurance
The premium of the many are used to pay the losses of the few
1. Premiums paid by policyholders who have not made a claim fund the losses of others
less fortunate
2. The risk is transferred to the insurer
3. Company shares and spreads the risk
4. Insurers also spread the risk over diverse geographic areas
5. The sharing and spreading of the risk between insurers and reinsurers may take
place through pools, which are syndicates of insurance or re-insurance companies that
have organized to underwrite a particular risk or group of similar risks.
6. Insurance relies on the law of large numbers.
7. There must be a balance because the cost of transferring the risk to te insurer must
be affordable to the average consumer.
Explain the second principle of insurance
The premiums shall be commensurate with the risk
1. Risks must be priced in such a way as to ensure that sufficient capital enters the pool
of funds to accommodate what is being drawn out for claims.
2. Premiums must be adequate to pay future claims.
,3. There is a balance that must be achieved because the price of the risk transfer must
be affordable to the average consumer.
4. Pricing risks adequately will help protect themselves from adverse selection.
5. Insurance premiums should also cover the costs of running the insurance business
and to provide a reasonable return to investors.
Explain the law of large numbers
The mathematical premise that states that the degree of uncertainty is reduced as the
number of events increases
Insurance system relies on the law of large numbers
Insurance companies rely on loss forecasts built by analyzing data from large groups of
similar risks.
Risks must be priced un such a way as to ensure that sufficient capital enters the pool
of funds to accomodate what is being drawn out by claims.
What is adverse selection?
Occurs when those with higher risks may purchase insurance in greater amounts than
those with lower risks.
How do insurers protect themselves from adverse selection?
Insurers protect themselves from adverse selection by attempting to measure risk and
either charging more for higher risks or refusing to cover them at all.
How can adverse selection result?
1.- The insurance company charges too high a premium for a risk. Then the low risk
client will seek insurance elsewhere where they can get better rates. The high-risk client
will most probably stay because they will be unable to find better terms.
2.- The broker places its poorer risks with one insurer and its better risks with another.
,3.- The insurance company doesn't charge adequately for the poorer risks; attracting
more of these undesirable risks.
What is the goal of re-insurance
To give insurers peace of mind, by allowing them to feel confident that a major
unplanned event or negative trend will not cause them, their policyholders, and their
shareholders any undue financial concern.
What are the 4 basic functions of reinsurance?
1. Finance
2. Stabilization
3. Capacity
4. Resource protection against catastrophes
How is reinsurance used for financing?
1. It offers a unique method of financing to insurance companies.
2. The reinsurance transaction frees up capital that would otherwise be tied up to meet
obligations. This can be used to commence or expand operations or to acquire a
subsidiary.
3. It is also used to meet solvency requirements.
How is reinsurance used for stabilization?
1. In order to manage the insurer's growth and development, reinsurance can be used
to keep operational results within reasonable parameters; without fluctuating
dramatically.
2. Stable results can maintain confidence of existing shareholders and attract new
capital.
How is reinsurance used for capacity?
1. Provides them the ability to insure businesses that are beyond their resources. For
example a company purchases reinsurance to write a business it would not normally
write, as an accommodation to a policyholder to write an entire account.
, 2. Insurers can accept a large share of a risk being written by several insurers so that
they can have a say in its terms and conditions. Without re-insurance, they would be
limited to write small lines and and follow the terms of the leader.
3. Insurers can accommodate the needs of the big producers, by purchasing
reinsurance for some risks that it would not otherwise be in the position to write.
How is reinsurance used for resource protection?
Use reinsurance to protect resources such as their capital and surplus, their loss ratio,
and their investment position against catastrophic loss.
What is investment income used for?
1. Allows company to pay dividends to shareholders
2. Provides the capital required to finance growth.
List some of the effects of insurance
1. Banks are willing to issue mortgages on buildings that are insured
2. Developers are willing to advance funds to building contractors on projects that are
guaranteed by surety bonds
3.Retailers are more willing to accept the commercial risk of operating a business when
able to purchase liability insurance.
4.Lawyers, doctors, architects, engineers, and other professionals are more willing to
provide their services when able to insure against the risk of liability for malpractice.
5. Manufacturers are more willing to accept the risks associated with shipping goods
when the goods are insured against transportation risks.
6. Members of society are more willing to sanction the use of automobiles as long as
motorists carry third party insurance
What are the economic impacts of insurance?
1. Insurance industry is interdependent on growth of economy. Without insurance no
individual corporation or institution could enjoy financial security and therefore have the
peace of mind.
2. Government and marketplace impose insurance requirements.
COMPLETE SOLUTIONS GUARANTEED PASS BRAND NEW 2025
What are the fundamental principles of insurance?
1.- The premiums of the many are used to pay the losses of the few.
2.- The premium shall be commensurate with the risk
Explain the first principle of insurance
The premium of the many are used to pay the losses of the few
1. Premiums paid by policyholders who have not made a claim fund the losses of others
less fortunate
2. The risk is transferred to the insurer
3. Company shares and spreads the risk
4. Insurers also spread the risk over diverse geographic areas
5. The sharing and spreading of the risk between insurers and reinsurers may take
place through pools, which are syndicates of insurance or re-insurance companies that
have organized to underwrite a particular risk or group of similar risks.
6. Insurance relies on the law of large numbers.
7. There must be a balance because the cost of transferring the risk to te insurer must
be affordable to the average consumer.
Explain the second principle of insurance
The premiums shall be commensurate with the risk
1. Risks must be priced in such a way as to ensure that sufficient capital enters the pool
of funds to accommodate what is being drawn out for claims.
2. Premiums must be adequate to pay future claims.
,3. There is a balance that must be achieved because the price of the risk transfer must
be affordable to the average consumer.
4. Pricing risks adequately will help protect themselves from adverse selection.
5. Insurance premiums should also cover the costs of running the insurance business
and to provide a reasonable return to investors.
Explain the law of large numbers
The mathematical premise that states that the degree of uncertainty is reduced as the
number of events increases
Insurance system relies on the law of large numbers
Insurance companies rely on loss forecasts built by analyzing data from large groups of
similar risks.
Risks must be priced un such a way as to ensure that sufficient capital enters the pool
of funds to accomodate what is being drawn out by claims.
What is adverse selection?
Occurs when those with higher risks may purchase insurance in greater amounts than
those with lower risks.
How do insurers protect themselves from adverse selection?
Insurers protect themselves from adverse selection by attempting to measure risk and
either charging more for higher risks or refusing to cover them at all.
How can adverse selection result?
1.- The insurance company charges too high a premium for a risk. Then the low risk
client will seek insurance elsewhere where they can get better rates. The high-risk client
will most probably stay because they will be unable to find better terms.
2.- The broker places its poorer risks with one insurer and its better risks with another.
,3.- The insurance company doesn't charge adequately for the poorer risks; attracting
more of these undesirable risks.
What is the goal of re-insurance
To give insurers peace of mind, by allowing them to feel confident that a major
unplanned event or negative trend will not cause them, their policyholders, and their
shareholders any undue financial concern.
What are the 4 basic functions of reinsurance?
1. Finance
2. Stabilization
3. Capacity
4. Resource protection against catastrophes
How is reinsurance used for financing?
1. It offers a unique method of financing to insurance companies.
2. The reinsurance transaction frees up capital that would otherwise be tied up to meet
obligations. This can be used to commence or expand operations or to acquire a
subsidiary.
3. It is also used to meet solvency requirements.
How is reinsurance used for stabilization?
1. In order to manage the insurer's growth and development, reinsurance can be used
to keep operational results within reasonable parameters; without fluctuating
dramatically.
2. Stable results can maintain confidence of existing shareholders and attract new
capital.
How is reinsurance used for capacity?
1. Provides them the ability to insure businesses that are beyond their resources. For
example a company purchases reinsurance to write a business it would not normally
write, as an accommodation to a policyholder to write an entire account.
, 2. Insurers can accept a large share of a risk being written by several insurers so that
they can have a say in its terms and conditions. Without re-insurance, they would be
limited to write small lines and and follow the terms of the leader.
3. Insurers can accommodate the needs of the big producers, by purchasing
reinsurance for some risks that it would not otherwise be in the position to write.
How is reinsurance used for resource protection?
Use reinsurance to protect resources such as their capital and surplus, their loss ratio,
and their investment position against catastrophic loss.
What is investment income used for?
1. Allows company to pay dividends to shareholders
2. Provides the capital required to finance growth.
List some of the effects of insurance
1. Banks are willing to issue mortgages on buildings that are insured
2. Developers are willing to advance funds to building contractors on projects that are
guaranteed by surety bonds
3.Retailers are more willing to accept the commercial risk of operating a business when
able to purchase liability insurance.
4.Lawyers, doctors, architects, engineers, and other professionals are more willing to
provide their services when able to insure against the risk of liability for malpractice.
5. Manufacturers are more willing to accept the risks associated with shipping goods
when the goods are insured against transportation risks.
6. Members of society are more willing to sanction the use of automobiles as long as
motorists carry third party insurance
What are the economic impacts of insurance?
1. Insurance industry is interdependent on growth of economy. Without insurance no
individual corporation or institution could enjoy financial security and therefore have the
peace of mind.
2. Government and marketplace impose insurance requirements.
