BU353 Study Guide - Midterm Guide: Reinsurance, Vehicle Insurance, Property Insurance
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Please circle your choice of answer
1. Moral hazard refers to:
a) Subject matter of the insurance and those facts that can be determined by inspection
b) Condition of the property that may increase the likelihood of the occurrence of a loss
c) Those situations in which there is a chance of loss or a chance of profit
d) Conditions attributable to character that are hard to detect and difficult to eliminate
2. Insurers achieve a spread of risk by:
a) Having customers distributed over many locations
b) Limited their volume of business to avoid exposure to loss
c) By writing insurance on as few classes of risk as possible
d) None of the above
3. An exceptionally high standard of honesty is implied by
a) Misrepresentation
b) Utmost good faith
c) An application
d) An oral contract
4. The main purpose of insurance is
a) To spread the losses of the many among the few
b) To provide a fund from which all losses will be paid
c) To spread the losses of the few among the many
d) None of the above
5. Which of the following does NOT have insurable interest
a) The owner of a home
b) The bank holding the mortgage on the home
c) The leasing company leasing the 2002 Audi to the homeowner
d) A prospective purchaser of the home
6. In general, when an insurance company indemnifies an insured it tries to:
a) Put the insured back in the same financial position he/she was in at the time he
purchased the policy
b) Put the insured back in the same financial position he/she was in when their values were
the highest
c) Better the financial position of an insured
d) Put the insured back in the same financial position he/she was in at the time the loss
occurred
7. People who stand in such relationship to property that they may be financially prejudiced by
its loss and financially benefit from its continuing existence are said to have:
a) Insurable interest in the property
b) Legal liability in the property
c) Legal capacity in the property
d) A right of subrogation in the property
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8. Which one (1) of the following statements is TRUE about insurers?
a) A stock company is owned jointly by the insureds.
b) The Facility Association is an insurance cooperative.
c) Mutual insurance companies are NOT required to be licensed by the Department of
Insurance
d) Lloyd’s of London is NOT an insurance company
9. The risk management process is used to
a) Determine the exposure clients need to manager
b) Provide a plan of action to manage risks clients face
c) Recommend insurance coverage for those risks best served by insurance cover
d) All of the above
10. The ultimate goal of the risk management process is to
a) Minimize the financial impact of loss exposures
b) Analyze loss exposures
c) Choose the best techniques to reduce loss
d) Predict the probable seriousness of loss
11. The cost of risk
a) Cannot be calculated because of numerous hidden costs involved in dealing with loss
b) Is to the insurer’s benefit when a client buys insurance but does not have a loss
c) Can be used as a tool by the risk manager to encourage line managers to comply with
practices and procedures the risk manager wants implemented
d) Is composed of the cost of loss control, insurance premiums, retained losses, and the
overhead of the risk management department
12. Sources of funds to meet the costs of retained losses are
a) Claims payout from insurance company
b) Payout under an hold harmless agreement
c) Premiums paid to insurers
d) Funded reserves
13. An insured who purchases an insurance policy to protect its property from direct or indirect
losses is using the risk management technique of risk
a) retention
b) reduction
c) transfer
d) avoidance
14. Facultative reinsurance is
a) a pre-arranged set up for reinsuring individual risks.
b) placed on an individual case basis.
c) the only alternative when underwriting information is scarce.
d) the only form of reinsurance that is available for automobile risks.
15.The term contracts of adhesion means
a) without prejudice.
b) a counter-offer made in connection with a proposed contract.
c) the voluntarily acceptance of a known risk.
d) that a court will interpret ambiguity in a contract against the person who drew up the
contract.
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Remember quality is more important than quantity. Basically the marking scheme is 1 mark per
point made
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1. Mr. Burke has purchased property insurance for his manufacturing plant. The current
market value of the plant is $325,000. The plant is insured for $250,000. The policy
contains a 90% coinsurance clause. The facility is damaged by a burst water pipe and the
insurer estimates that the damage is $30,000
a. Why do insurers insist on consumers carrying full (or close to) full coverage? (2
marks)
The rates used by insurers already take into account probability of total loss. Therefore
the rate does not change with the amount of insurance purchased. Insured’s who insure
for less than full value do not generate sufficient premium to cover actual losses that will
occur. Insures insist on consumer carrying full value so that they collect adequate
premiums.
b. In this scenario what is the maximum proportion of losses paid by the insurer? (2
marks) 250,000
(325,000*90%) = 250,000 = .8547 or 85%
292,500
c. What is the total amount paid by the insurer? (2 marks)
=30,000*85%
=25,500 I also accepted 30,000*.8547 = 25,641
d. d. An insured owns a building valued at $200,000 and insures it for same amount
subject to an 80% co-insurance clause. A fire does $100,000 damage. How much of
the loss will the insurer pay? (2 marks)
200,000 Coinsurance Requirement met – loss fully paid $100,000
160,000
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Document Summary
Basically the marking scheme is 1 mark per point made: mr. burke has purchased property insurance for his manufacturing plant. The current market value of the plant is ,000. The facility is damaged by a burst water pipe and the insurer estimates that the damage is ,000: why do insurers insist on consumers carrying full (or close to) full coverage? (2 marks) The rates used by insurers already take into account probability of total loss. Therefore the rate does not change with the amount of insurance purchased. Insured"s who insure for less than full value do not generate sufficient premium to cover actual losses that will occur. Insures insist on consumer carrying full value so that they collect adequate premiums: in this scenario what is the maximum proportion of losses paid by the insurer? (2 marks) 250,000 (325,000*90%) = 250,000 = . 8547 or 85% 292,500: what is the total amount paid by the insurer? (2 marks)
