C16 THE BUSINESS OF INSURANCE EXAM NEWEST 2024-2025
QUESTIONS AND CORRECT ANSWERS
List the two fundamental principles of insurance. - CORRECT ANSWER✅✅✅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? - CORRECT
ANSWER✅✅✅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? - CORRECT ANSWER✅✅✅1. A risk pool is a sharing and spreading
of risk between insurers and re-insurers.
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. - CORRECT ANSWER✅✅✅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. - CORRECT ANSWER✅✅✅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? - CORRECT ANSWER✅✅✅1. Refers to the amount of time
between an incident and the determination of the claim.
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. - CORRECT ANSWER✅✅✅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.
-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. - CORRECT ANSWER✅✅✅-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.
-Risk exposures are escalating. As the planet becomes more crowded, weather becomes more
erratic, values become more concentrated, technologies become more advances and our societies
become more litigious
-Money paid to indemnify people and fix property and bodily injury boosts the economy
, Why is there a need for residual market mechanisms? - CORRECT ANSWER✅✅✅-
Residual market mechanisms are established by the auto mobile insurance industry to provide a
last resort insurance facility for consumers. Not-for-profit Facility Association (FA)
-Quebec operates it's residual independently
-This ensures that insurance coverage is available even to those who are considered to be high
risk and unattractive to mainstream insurers
-Every insurer licensed to write auto liability insurance in FA industries is required to be a
member of the organization and to follow rules set by the board of directors regarding scope of
coverage, terms and standards of coverage provided
-The FA does not issue insurance policies, instead it designates certain companies to provide
specific services and this includes claim handling
In property and casualty insurance, what are the two traditional methods of distribution and how
do they differ? - CORRECT ANSWER✅✅✅1. Independent broker/agents:
-Most insurance business written in Canada has been placed through brokers which has its roots
in the British system
-The size of the country and its sparse and dispersed population has made broker-based business
a more practical option. Economical and efficient way for insurers to market their products
2. Direct response method:
-hybrid of direct right of distributing insurance directly to consumers by using different types of
media to encourage customers to respond to insurance marketing campaigns. Consumers call toll
free to a centralized call centre for advice or to purchase insurance
QUESTIONS AND CORRECT ANSWERS
List the two fundamental principles of insurance. - CORRECT ANSWER✅✅✅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? - CORRECT
ANSWER✅✅✅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? - CORRECT ANSWER✅✅✅1. A risk pool is a sharing and spreading
of risk between insurers and re-insurers.
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. - CORRECT ANSWER✅✅✅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. - CORRECT ANSWER✅✅✅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? - CORRECT ANSWER✅✅✅1. Refers to the amount of time
between an incident and the determination of the claim.
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. - CORRECT ANSWER✅✅✅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.
-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. - CORRECT ANSWER✅✅✅-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.
-Risk exposures are escalating. As the planet becomes more crowded, weather becomes more
erratic, values become more concentrated, technologies become more advances and our societies
become more litigious
-Money paid to indemnify people and fix property and bodily injury boosts the economy
, Why is there a need for residual market mechanisms? - CORRECT ANSWER✅✅✅-
Residual market mechanisms are established by the auto mobile insurance industry to provide a
last resort insurance facility for consumers. Not-for-profit Facility Association (FA)
-Quebec operates it's residual independently
-This ensures that insurance coverage is available even to those who are considered to be high
risk and unattractive to mainstream insurers
-Every insurer licensed to write auto liability insurance in FA industries is required to be a
member of the organization and to follow rules set by the board of directors regarding scope of
coverage, terms and standards of coverage provided
-The FA does not issue insurance policies, instead it designates certain companies to provide
specific services and this includes claim handling
In property and casualty insurance, what are the two traditional methods of distribution and how
do they differ? - CORRECT ANSWER✅✅✅1. Independent broker/agents:
-Most insurance business written in Canada has been placed through brokers which has its roots
in the British system
-The size of the country and its sparse and dispersed population has made broker-based business
a more practical option. Economical and efficient way for insurers to market their products
2. Direct response method:
-hybrid of direct right of distributing insurance directly to consumers by using different types of
media to encourage customers to respond to insurance marketing campaigns. Consumers call toll
free to a centralized call centre for advice or to purchase insurance
