Fundamentals of Insurance FINAL Exam Solved 100%

Chapter 1 - AnswerIntroduction to General Insurance The major function of insurance is to achieve a spread of risk. Explain what is meant by spread of risk. - Answerthe major function of insurance is to share the losses of the few among the many What are the five functions of insurance? - Answer1. spread of risk (major function) 2. basis of credit system 3. eliminates worry and encourages entrepreneurship 4. loss prevention and loss reduction 5. source of employment and investment capital An analysis of the definition of insurance reveals five important points. Identify them and provide a brief explanation for each. - Answer1. insurance provides a means of shifting one's financial responsibility for a loss to another party 2. payment will be made only in the event of the happening of a certain risk or peril 3. the amount of payment is restricted to the amount required to indemnify the insured 4. insurance covers losses to which the object of insurance *may* be exposed 5. the indemnity provided can be in the form of a sum of money or other thing of value Define risk. - Answerthe chance of financial loss to which the object of insurance may be exposed Define peril. - Answerthe cause of loss What are the three types of property and casualty insurance in Canada? What is another name for this type of insurance? - Answerautomobile insurance property insurance liability insurance There are two major types of insurers. Identify them and provide examples of organizational differences. - Answerprivate insurers government insurers What are the two most common types of private insurers? Provide a brief explanation of them both. (money and main goal) - Answer(a) stock companies -money to operate a stock company may come from private funds or through public sale of stock -ownership rests in the hands of the company's shareholders whose main purpose is to derive a profit from their investment (b) mutual companies -money made is refunded to policyholders directly through dividends or through subsequent rate adjustments -main goal is to provide policyholders with insurance at as low of a cost as possible Which types of insurance are government insurers most often involved with? - Answermedical insurance, employment insurance, workers' compensation, compulsory automobile insurance Identify two methods used by insurers to sell their products. - Answerdirect writing system independent brokerage system Explain how direct writing system deals with: (a) remuneration (b) ownership of client files (c) administration functions - Answer(a) either salary or commission or both (b) insurer owns all of the business (c) insurer performs all administrative functions Explain how independent brokerage system deal with: (a) remuneration (b) ownership of client files (c) administration functions - Answer(a) brokerage is paid commission by insurer which pays costs, salaries, rent (b) brokerage owns business it produces (c) brokerage responsible for providing policyholders with a number of client services Of the two distribution methods, which is the most common? - Answerindependent brokerage system Chapter 2 - AnswerInsurance Contracts Identify three major categories of insurance needs/ risk. - Answerpersonal risk property risk liability risk Identify four options an insured may use in dealing with risk. Which of these options is the least practical? - Answeravoidance of risk controlling of risk retention of risk transfer of risk avoidance is least practical, transfer is most practical and popular There are two types of risk. Identify them and provide a brief description for each. Of these types of risk, which are insurable? - Answerspeculative risk: the possibility of either financial loss or gain pure risk: the chance of financial loss with no chance of financial gain only pure risk is insurable Define contract. - Answeran agreement between two or more parties which is enforceable at law Identify the five elements required to be present in all contracts. Identify the three additional elements which are unique to insurance contracts and which must be present if an insurance contract is to be enforceable at law. - Answeragreement consideration legality of object legal capacity of the parties to contract genuine intention insurable interest utmost good faith indemnity In the insurance business, it is common for brokers to "bind" an insurer on a risk. Explain. - Answerthe broker has committed the insurer to provide a contract of insurance on the subject matter under discussion Identify two documents or sources which brokers can refer to in order to determine the extent of "binding authority" given to them. - Answeragency agreement insurer's rate manual Identify three types of insurance forms used by insurers to make changes to an existing policy. State the purpose of each of these forms. - Answerendorsements or riders: a change in the terms of the contract, like change in limits or deleting or adding exclusion or adding coverage floaters: to provide coverage for property having a high degree of mobility separate policies: additional coverage that original policy does not cover, also doesn't have to be issued by original insurer Persons considered to be competent to contract are said to have this... while a minor does not. - Answerlegal capacity People who are able to show that they would suffer financially by a loss are said to have this. - Answerinsurable interest Is said to exist where an unconditional acceptance of an offer has been made. - Answeragreement A part of all insurance contracts which attempts to provide insureds with the actual amount of their loss... no more and no less. - Answerindemnity Is an exchange of something of value. - Answerconsideration Is present when it can be shown the contract was not affected by fraud, duress, concealment or mistake. - Answergenuine intention When a contract insures property which is stolen, this element is said not to be present. - Answerlegality of object This contractual requirement is breached when an applicant for insurance deliberately withholds information about previous claims, cancellations, or refusals of insurance. - Answerutmost good faith In the event that any one of the eight elements of an insurance contract is absent or violated, the insurance contract may be considered to be: - Answer-void: one which is considered to never have existed -voidable: one which is void as to the wrongdoer but not void as to the wronged party, unless wronged party elects to void it Insurance binders can be in two forms. Identify both and give a brief explanation. - Answer-oral: oral contracts are just as binding as are those made in writing -written: these documents form the basis of the contract until insurer prepares and distributes formal policy documents Chapter 3 - Answerthe role of government in the insurance industry Perhaps the most important area of government regulation, whether provincial or federal, involves monitoring the financial strength of insurers. Explain the role of the Property and Casualty Insurance Compensation Corporation when an insurer becomes insolvent. - Answerwhen an insurer becomes insolvent, the PACICC pays all valid claims. all participating insurance companies are then charged an assessment to cover the total amount of the claims. the amount of each insurer's contribution is based on total direct premiums written by it. Insurance is fiduciary in nature. Define "fiduciary". - Answera fiduciary is one who handle's other people's money, strong relationship involving trust Briefly explain the fiduciary obligations of insurers. - Answerpremiums paid to insurers are not fully earned until the expiry of the insurance policy unearned premiums are considered to be held in trust to refund to insureds in case the policy is cancelled prior to expiry date Briefly explain the fiduciary obligations of brokers. - Answercommissions are not fully earned until expiry of the insurance policy unearned commissions are considered to be held in trust to refund to insureds in case the policy is cancelled prior to expiry date Briefly summarize the provisions of the "Removal" clause contained in policies of fire insurance. - Answerthe Insurance Act states that every policy insuring against the peril of fire shall, in certain circumstances, extend to cover insured property when moved to another location not stated on the policy The right of "subrogation" is guaranteed in the Insurance Acts of the Common Law provinces. State the meaning of "subrogation" and indicate how this right is exercised by the insurer. - Answerput oneself into another's shoes. the Insurance Act allow the insurer to place itself in the insured's shoes in respect of their right to recover the amount of the loss from the responsible party. as such, any action commenced against the responsible party is taken in the insured's name How can a term or condition of the insurance contract be waived by an insurance broker? Explain. - Answera term or condition of an insurance contract can be waived by an insurace broker if the waiver is provided in writing and signed by a person authorized for that purpose by the insurer Your clients received their policy one month ago. It has not yet been paid for. Yesterday, they had a fire loss. What affect does the delivery of the policy have on the obligations of the insurer? - Answerwhen the insurance policy has been delivered, but not paid for it shall be as binding on the insurer as if the premium had been paid. in other words, any claim insured under the policy will be paid even though the premium has not been paid Identify three coverages required to be provided on all policies of fire insurance. - Answerfire lightning explosion of natural, coal, or manufactured gas Explain and provide an example of a friendly fire. - Answerone that is contained in its proper receptacle. it is where it is supposed to be. fireplace barbecue Explain and provide an example of hostile fire. - Answerone which escapes from its receptacle or originates outside of any such receptacle. fire that spreads fire that becomes much larger than intended Of the two types of fires, which one is insured by a fire policy? - Answerhostile fires Name the statutory fire condition. - AnswerFOLLOWING CARDS Deliberate attempt to deceive with a view to securing some profit. - Answerfraud Insurer is not entitled to rights of ownership or control; nor can insured abandon insured property to it. - Answerentry, control, abandonment Written notice to the insurer can be delivered at or sent by registered mail to the chief agency or head office of the insurer in the province. - Answernotice Any change which serves to increase the chance of loss arising after the policy is issued. - Answermaterial change Required to be made within 60 days after completion of proof of loss, unless the contract provides for a shorter period. - Answerwhen loss payable Not insured unless interest of insured is stated in the contract. - Answerproperty of others Policy is automatically continued to protect insureds after an authorized assignment under the Bankruptcy Act or insureds who have possession of insured property as a result of a change of title due to succession, operation of law or by death. - Answerchange of interest Requires that the insured take all reasonable steps to protect insured property from further damage. - Answersalvage Must be commenced within one year (two years in Manitoba and Saskatchewan) after the loss occurs. - Answeraction Option available to either the insurer or insured when there is a disagreement as to the value of property insured, saved, or amount of loss. - Answerappraisal Identifies the documents needed when a claim is filed. - Answerrequirements after loss Consists of a misstatement and/or fraudulent omission of a material fact. - Answermisrepresentation Requires that notice of the insurer's intentions be provided to the insured within 30 days after receipt of the proof of loss. - Answerreplacement Requires that the insured be provided with 15 days notice by registered mail or five days notice when personally delivered. - Answertermination Entities any party of interest, or agent of insured to file a claim on behalf of the insured. - Answerwho may give notice and proof Chapter 4 - AnswerThe Insurance Process State the role of the broker in the insurance process. - Answerto serve as the intermediary between the client and the insurer State the primary duty owed by brokers to clients. - Answerto ensure they receive the right insurance advice and coverage(s) State the primary duty owed by brokers to insurers. - Answertell the truth about the risks they submit and not withhold or conceal important information Brokers do make mistakes, some of which can result in financial loss to their clients. Identify the most common cause of errors and omissions claims. - Answerinadequate coverage, accounting for nearly 50% of all claims Who are underwriters? - Answeremployees of insurance companies State the primary role of underwriters. - Answerto select those risks likely to be the most profitable to the insurer Identify the four sources of information used by underwriters when making a decision regarding the sustainability of a risk. - Answerthe application the broker loss experience data inspection reports Explain physical hazards and provide an example. - Answerconditions relating to the premises which may cause a peril to occur type of building construction, occupancy, housekeeping Explain moral hazards and provide an example. - Answersubjective characteristics of the applicant that could cause a peril to occur financial condition, moral character, indifference to loss