CAIB 3 Exam Prep with Complete Solutions
a) The organization must conduct three forecasts. Indicate the nature of these forecasts
- ANSWER-1. Involves the frequency and severity of losses that can be expected.
2. measures the effects that various risk control and risk financing techniques are likely
to have on the frequency, severity and predictability of those projected losses.
3. forecast of the costs of these techniques.
a) Indicate if the following businesses are candidates for S.P.F. No. 4 Standard Garage
Automobile Policy; state YES or NO.
I. One of the accounts is an up-scale night club that offers a valet service to its
customers so that they don't have to drive around looking for a parking place for their
vehicle.
II. Another is a retailer of car audio and visual systems, which they also install in their
customers' vehicles.
III. A third account is a custom upholstery shop which recovers car seats and benches
brought by customers who are restoring vintage and collectors' vehicles. - ANSWER-I.
YES; II. YES; III. NO
b) A Draft is only one of the methods of payment for goods in international trade.
i. Explain when Cash in Advance would be used by the seller, and at what point the
seller's interest in the goods ceases.
ii. Indicate how a buyer would pay for goods under an Open Account and why a seller
might agree to this method of payment. - ANSWER-i. Cash in Advance is used when
the buyer is not well known to the seller or when the products are custom manufactured
or of a type for which no ready market exists. With this method of payment the seller's
insurable interest ceases from the moment the payment has been made.
ii. Open Account is a charge account, where the buyer arranges settlement at regular
intervals, usually monthly or quarterly, as agreed upon by the seller. This arrangement
is made for very reliable customers and, as a general rule only in connection with goods
that have a ready market.
b) Explain how the financial consequences of a loss can be measured - ANSWER-
measured according to the likelihood of a loss occurring which is the frequency
combined with the seriousness or severity of losses that could occur.
b) Explain the benefits of suretyship gained by both the principal and the obligee -
ANSWER-Principal gain confidence by the fact that the surety is satisfied with their
ability to carry out the required task. The guarantee of performance by the surety gives
the obligee the necessary confidence to undertake various projects.
, b) How can businesses that don't have a good data base of their own loss experience
still arrive at a realistic forecast? - ANSWER-By using probability analysis and trend
analysis future losses can be predicted with some certainty.
b) How does the Insurer measure the loss under ocean marine cargo insurance? -
ANSWER-The loss is measured in terms of Percentage of Insured Value Lost.
b) Identify and briefly explain the two dimensions of the risk management process. -
ANSWER-1. Decision making process This is a five-step process which attempts to
arrive at the most cost effective means available to the organization in dealing with its
loss exposures.
2. Management or administrative process which relies on the organization's ability to
plan, organize, lead, and control in order to minimize the adverse effects of accidental
losses. For this process to be successful it must receive the full support of both owners
and management.
b) Identify the two classes of bonds that Corporate Suretyship includes and provide a
brief explanation of each - ANSWER-Fidelity Bonds and Surety Bonds.
Fidelity Bonds serve to protect employers for the dishonest acts of employees.
Surety Bond is an undertaking by one party (the surety) to become accountable to
another party (the obligee) for the performance of an obligation or undertaking by a third
party (the principal). It is a promise to provide credit, if and when needed, to ensure the
faithful performance of the obligation.
b) Identify three factors that affect the working capital. - ANSWER-the labour and
material ratio, subcontracts, and customer paying habits.
b) If the Umbrella Liability Policy insures exposures excluded under the primary policy
coverage is subject to a Self-Insured Retention.
What purposes does the Self-Insured Retention serve? - ANSWER-Has the same
function as a deductible for losses not anticipated by the insurer. It encourages the
Insured to purchase coverage against obvious liability exposures included under the
primary policy.
b) Indicate the cancellation provisions contained in the policy - ANSWER-The Insurer is
required to provide the insured with at least 10 days notice of cancellation. Although the
insured may be entitled to a pro-rata premium refund, no refund will be paid if the
aircraft has been subject to a loss exceeding the premium paid for the aircraft.
a) The organization must conduct three forecasts. Indicate the nature of these forecasts
- ANSWER-1. Involves the frequency and severity of losses that can be expected.
2. measures the effects that various risk control and risk financing techniques are likely
to have on the frequency, severity and predictability of those projected losses.
3. forecast of the costs of these techniques.
a) Indicate if the following businesses are candidates for S.P.F. No. 4 Standard Garage
Automobile Policy; state YES or NO.
I. One of the accounts is an up-scale night club that offers a valet service to its
customers so that they don't have to drive around looking for a parking place for their
vehicle.
II. Another is a retailer of car audio and visual systems, which they also install in their
customers' vehicles.
III. A third account is a custom upholstery shop which recovers car seats and benches
brought by customers who are restoring vintage and collectors' vehicles. - ANSWER-I.
YES; II. YES; III. NO
b) A Draft is only one of the methods of payment for goods in international trade.
i. Explain when Cash in Advance would be used by the seller, and at what point the
seller's interest in the goods ceases.
ii. Indicate how a buyer would pay for goods under an Open Account and why a seller
might agree to this method of payment. - ANSWER-i. Cash in Advance is used when
the buyer is not well known to the seller or when the products are custom manufactured
or of a type for which no ready market exists. With this method of payment the seller's
insurable interest ceases from the moment the payment has been made.
ii. Open Account is a charge account, where the buyer arranges settlement at regular
intervals, usually monthly or quarterly, as agreed upon by the seller. This arrangement
is made for very reliable customers and, as a general rule only in connection with goods
that have a ready market.
b) Explain how the financial consequences of a loss can be measured - ANSWER-
measured according to the likelihood of a loss occurring which is the frequency
combined with the seriousness or severity of losses that could occur.
b) Explain the benefits of suretyship gained by both the principal and the obligee -
ANSWER-Principal gain confidence by the fact that the surety is satisfied with their
ability to carry out the required task. The guarantee of performance by the surety gives
the obligee the necessary confidence to undertake various projects.
, b) How can businesses that don't have a good data base of their own loss experience
still arrive at a realistic forecast? - ANSWER-By using probability analysis and trend
analysis future losses can be predicted with some certainty.
b) How does the Insurer measure the loss under ocean marine cargo insurance? -
ANSWER-The loss is measured in terms of Percentage of Insured Value Lost.
b) Identify and briefly explain the two dimensions of the risk management process. -
ANSWER-1. Decision making process This is a five-step process which attempts to
arrive at the most cost effective means available to the organization in dealing with its
loss exposures.
2. Management or administrative process which relies on the organization's ability to
plan, organize, lead, and control in order to minimize the adverse effects of accidental
losses. For this process to be successful it must receive the full support of both owners
and management.
b) Identify the two classes of bonds that Corporate Suretyship includes and provide a
brief explanation of each - ANSWER-Fidelity Bonds and Surety Bonds.
Fidelity Bonds serve to protect employers for the dishonest acts of employees.
Surety Bond is an undertaking by one party (the surety) to become accountable to
another party (the obligee) for the performance of an obligation or undertaking by a third
party (the principal). It is a promise to provide credit, if and when needed, to ensure the
faithful performance of the obligation.
b) Identify three factors that affect the working capital. - ANSWER-the labour and
material ratio, subcontracts, and customer paying habits.
b) If the Umbrella Liability Policy insures exposures excluded under the primary policy
coverage is subject to a Self-Insured Retention.
What purposes does the Self-Insured Retention serve? - ANSWER-Has the same
function as a deductible for losses not anticipated by the insurer. It encourages the
Insured to purchase coverage against obvious liability exposures included under the
primary policy.
b) Indicate the cancellation provisions contained in the policy - ANSWER-The Insurer is
required to provide the insured with at least 10 days notice of cancellation. Although the
insured may be entitled to a pro-rata premium refund, no refund will be paid if the
aircraft has been subject to a loss exceeding the premium paid for the aircraft.
