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C16 THE BUSINESS OF INSURANCE EXAM
QUESTIONS AND CORRECT ANSWERS 2024/2025
GRADED A+.
List the two fundamental principles of insurance. - (answers)1. The premiums of
the many are used to pay the losses of the few.
2. The premiums shall be commensurate with the risk.
-Insurance fulfils a societal need
-Provides consumers with financial security for particular types of accidental
losses. Also underpins the economy facilitating economic growth and societal
development
-Insurance is the promise to indemnify another person against the possibility of a
loss
-Significant claim is paid based on a nominal premium
Why would an insurer spread risks over diverse geographic areas? - (answers)1.
Risks spread over a larger geographic area soften the burden of localized disasters
on insurers.
2. For example, a severe windstorm in one part of the country would have a
devastating effect on an insurer who had concentrated its risks in this one area.
What is a risk pool? - (answers)1. A risk pool is a sharing and spreading of risk
between insurers and re-insurers.
, 2
2. Formed risk pools are syndicates of insurance or reinsurance companies that
have organized to underwrite a particular risk or group of similar risks.
Explain the law of large numbers. - (answers)1. A mathematical premise which
states that the degree of uncertainty is reduces as the number of events increase.
2. Insurance relies on the forecasts of loss certainty in a large group of similar
risks.
3. Enough 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 to pay for
claims.
Define adverse selection. - (answers)1. Describes the process by which potential
policyholders use their private knowledge of their own high level of risk when
deciding whether or not to buy insurance.
2. High-risk individuals will try to buy lots of insurance and pay a comparatively
high rate of premium if they are allowed.
3. Low-risk clients might not buy any insurance because the price is too high.
In insurance, what is a tail? - (answers)1. Refers to the amount of time between
an incident and the determination of the claim.
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2. Short-tail lines are those where the injury becomes known quite quickly.
3. Long-tail lines are those which a claim may be separated from the
circumstances that caused it by as many as 10, 15, 20 years or more. Many
product liability lines have long-tail exposures.
Name TWO concerns of Ontario automobile excess reinsurers that relate to the
effects of long-tail liabilities. - (answers)1. Severe Injuries.
2. Long-tail trends for prior accident years.
3. Inadequate reserving at the primary insurance level
-Primary insurance companies rely on reinsurers to back stop auto coverage
particularly for catastrophic claims that end up costing over 1M.
-As of recent times there have been relatively light catastrophic events which led
to minor rate increase for reinsurance catastrophe treaties.
-Claims from two to five million have reinsurance layers. There has been a general
increase in the number of claims exceeding thresholds such as 2M-5M over the
past 10 years.
, 4
-Predicting long tail pricing because it is difficult to accurately predict the
outcome of claims that have not yet occurred and will remain open for years
before the final settlement is reached
-Reinsurers have seen patterns of very late reporting of catastrophic injury claims
by insurers and after being recognized and reported, they continue to develop
adversely for years
List three ways that insurance benefits society. - (answers)-Insurance provides a
certain freedom of action, encouraging activities to flourish in industries,
commerce, organizations and families
-Insurance industry facilitates growth but depends on growth of the economy
-Insurance may facilitate borrowing towards the purchase of a home, car or
cottage (an asset)
-Insurance industry contributes to the economy by providing employment to
thousands of Canadians
-Insurance companies hold large investment holdings, such as investments to help
finance governments and businesses.
C16 THE BUSINESS OF INSURANCE EXAM
QUESTIONS AND CORRECT ANSWERS 2024/2025
GRADED A+.
List the two fundamental principles of insurance. - (answers)1. The premiums of
the many are used to pay the losses of the few.
2. The premiums shall be commensurate with the risk.
-Insurance fulfils a societal need
-Provides consumers with financial security for particular types of accidental
losses. Also underpins the economy facilitating economic growth and societal
development
-Insurance is the promise to indemnify another person against the possibility of a
loss
-Significant claim is paid based on a nominal premium
Why would an insurer spread risks over diverse geographic areas? - (answers)1.
Risks spread over a larger geographic area soften the burden of localized disasters
on insurers.
2. For example, a severe windstorm in one part of the country would have a
devastating effect on an insurer who had concentrated its risks in this one area.
What is a risk pool? - (answers)1. A risk pool is a sharing and spreading of risk
between insurers and re-insurers.
, 2
2. Formed risk pools are syndicates of insurance or reinsurance companies that
have organized to underwrite a particular risk or group of similar risks.
Explain the law of large numbers. - (answers)1. A mathematical premise which
states that the degree of uncertainty is reduces as the number of events increase.
2. Insurance relies on the forecasts of loss certainty in a large group of similar
risks.
3. Enough 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 to pay for
claims.
Define adverse selection. - (answers)1. Describes the process by which potential
policyholders use their private knowledge of their own high level of risk when
deciding whether or not to buy insurance.
2. High-risk individuals will try to buy lots of insurance and pay a comparatively
high rate of premium if they are allowed.
3. Low-risk clients might not buy any insurance because the price is too high.
In insurance, what is a tail? - (answers)1. Refers to the amount of time between
an incident and the determination of the claim.
, 3
2. Short-tail lines are those where the injury becomes known quite quickly.
3. Long-tail lines are those which a claim may be separated from the
circumstances that caused it by as many as 10, 15, 20 years or more. Many
product liability lines have long-tail exposures.
Name TWO concerns of Ontario automobile excess reinsurers that relate to the
effects of long-tail liabilities. - (answers)1. Severe Injuries.
2. Long-tail trends for prior accident years.
3. Inadequate reserving at the primary insurance level
-Primary insurance companies rely on reinsurers to back stop auto coverage
particularly for catastrophic claims that end up costing over 1M.
-As of recent times there have been relatively light catastrophic events which led
to minor rate increase for reinsurance catastrophe treaties.
-Claims from two to five million have reinsurance layers. There has been a general
increase in the number of claims exceeding thresholds such as 2M-5M over the
past 10 years.
, 4
-Predicting long tail pricing because it is difficult to accurately predict the
outcome of claims that have not yet occurred and will remain open for years
before the final settlement is reached
-Reinsurers have seen patterns of very late reporting of catastrophic injury claims
by insurers and after being recognized and reported, they continue to develop
adversely for years
List three ways that insurance benefits society. - (answers)-Insurance provides a
certain freedom of action, encouraging activities to flourish in industries,
commerce, organizations and families
-Insurance industry facilitates growth but depends on growth of the economy
-Insurance may facilitate borrowing towards the purchase of a home, car or
cottage (an asset)
-Insurance industry contributes to the economy by providing employment to
thousands of Canadians
-Insurance companies hold large investment holdings, such as investments to help
finance governments and businesses.
