C11 PRINCIPLES AND PRACTICE OF INSURANCE

Transcription

1 CIP PROGRAM EXAMINATION July 2002 C11 PRINCIPLES AND PRACTICE OF INSURANCE IMPORTANT The time allowed for this exam is 3 hours. Total marks: 200 You must hand in this paper and any paper used for rough work to the supervisor when you leave the examination room. Failure to do so may result in disqualification. Section A: Multiple-Choice Questions Question 1. For the following multiple-choice questions, fill in the circle of the letter that identifies the most correct answer. DO NOT MARK THE ANSWERS ON THESE PAGES. USE THE FIRST PAGE OF YOUR ANSWER BOOK. 1. Which of the following is NOT a function of insurance? (A) Aid to credit (B) Guarantee of total security (C) Source of capital (D) Spread of risk 2. An item of information about a risk that, if known, could affect an underwriter's decision to accept or decline the risk or to charge a particular rate of premium is referred to as a (A) consideration. (B) material fact. (C) representation. (D) warranty.

2 -2-3. Which of the following is a true statement? (A) A breach of policy condition is an estoppel. (B) A warranty is the equivalent of a non-waiver agreement. (C) An estoppel can be created by conduct as well as statement. (D) The use of the term "without prejudice" creates an estoppel. 4. A non-waiver agreement is (A) the equivalent of an admission of liability. (B) the equivalent of an estoppel. (C) the voluntary giving up of a known right. (D) used to prevent the creation of an estoppel. 5. The non-profit organization for the testing of certain products is called the (A) Consumers Association of Canada. (B) Federal Department of Consumer and Commercial Affairs. (C) Insurance Bureau of Canada. (D) Underwriters Laboratories of Canada. 6. In insurance terminology, a hazard is (A) a factor that could influence the occurrence of a loss. (B) the chance of loss. (C) the object of insurance. (D) the risk of loss. 7. Liability arises out of (A) obligations to others. (B) pure risk. (C) severity of loss. (D) speculative risk. 8. Risk management does NOT include (A) loss prevention. (B) risk control. (C) risk measurement. (D) risk underwriting. 9. Insurance is a (A) contract of mutual indemnity. (B) type of agreement based on speculative risks. (C) method of sharing the losses of a few people among many. (D) type of contract issued by an insurance company. continued on next page

3 Indemnification is (A) a type of no-fault insurance. (B) the operation of the law of averages. (C) the provision of compensation. (D) the reimbursement of financial loss. 11. Which of the following is a true statement? (A) Insurance depends upon credit. (B) Insurers depend upon the creditworthiness of their policyholders. (C) The provision of credit frequently depends upon insurance. (D) Surety bonds are never offered by insurance companies. 12. Pure premium is the (A) premium required to pay the anticipated losses. (B) premium required to pay the losses that have occurred. (C) rate or unit of premium required. (D) total premium required by the insurer. 13. Common Law (A) applies to all parts of Canada, Great Britain and the United States. (B) deals with extra-marital relationships. (C) in Canada, has been superseded by Canadian statute law. (D) follows principles set forth in earlier legal decisions. 14. Which of the following is NOT true of offers? An offer (A) may be implied by a gesture. (B) may be verbal. (C) must be definite. (D) must be in writing. 15. Which of the following is true of void contracts? (A) A contract is automatically void if made under duress or undue influence. (B) A contract is void if the subject of the contract is illegal. (C) A contract is void when, through a mutual mistake, one party is thinking of one type of subject matter of the contract and the other party is thinking of something else as the subject matter of the contract. (D) The terms of a void contract can be enforced against the party whose actions made the contract voidable.

4 A valued insurance contract is one (A) that produces a very large premium. (B) that will always provide strict indemnity. (C) that will pay for the replacement of a lost or destroyed item. (D) under which, in the event of a loss, a predetermined amount will be paid. 17. The term contra proferentem means (A) any ambiguity in the policy wording will be interpreted by the court in favour of the insured. (B) the insurer is totally bound by the terms of the policy even though the insured may have failed to make full relevant disclosures about the risk to be insured. (C) there can be no argument about the policy wording once the insured has accepted delivery of the policy. (D) under no circumstance can the insurer deny liability for claims. 18. A proof of loss is (A) a claim document completed and signed by the insured. (B) a form of non-waiver agreement. (C) allied to the principle of indemnity. (D) always made without prejudice. 19. Insurance is based on the existence of (A) consideration. (B) indemnity. (C) loss. (D) risk. 20. Which of the following does NOT fall into the category of general insurance? (A) Business interruption (B) Crime insurance (C) Health insurance (D) Surety bonds 21. Insurers try to achieve a balance of premiums to losses by (A) having a good spread of risk. (B) insuring a small number of superior risks. (C) specializing in one or two kinds of risk. (D) writing as much business in one location as possible. continued on next page

5 The law of large numbers (A) affects the reliance to be placed on a given probability. (B) identifies loss exposures. (C) improves loss prevention and safety. (D) reduces the chance that an event may happen. 23. Which of the following is NOT a part of the ratemaking process? (A) Classifying the risks (B) Determining the applicable loadings (C) Evaluating the reduction in uncertainty (D) Gathering statistics on past losses 24. Moral hazard (A) can usually be identified and measured readily. (B) refers to the subject matter of insurance. (C) refers to whether or not the insured has a criminal record. (D) relates to conditions that have to do with the human element of the risk. 25. Exposure is the (A) amount of money an insurer will likely pay on a given risk. (B) danger of loss arising from what may happen to other risks nearby. (C) danger of loss associated with the materials used in a building. (D) degree of risk associated with a given piece of property. 26. Lloyds of London (A) is a commodity exchange (including insurance). (B) is made up of syndicates. (C) is owned by its syndicates. (D) only deals in marine insurance. 27. Which of the following is true of brokers' accounts? (A) The operating account may be used to pay for rent and salaries as well as for claims. (B) The operating account may be used to pay for rent and salaries as well as for miscellaneous expenses. (C) The trust account is the account into which all commissions collected from insureds are deposited and from which net premiums are paid to insurers. (D) The trust account is the account into which all commissions collected from insurers are deposited.

6 A precedent is a (A) legal decision given in a prior case that could be persuasive as to the decision to be given in a current case. (B) legal decision that must be rendered by a court prior to the payment of legal damages. (C) legal procedure that must precede the commencement of a legal action. (D) statutory rule that must be followed in all cases. 29. The Civil Code of Quebec is (A) a system of laws enacted by the National Assembly of Quebec. (B) the law of precedent in Quebec. (C) the Quebec equivalent of the Common Law. (D) the Quebec equivalent of the Criminal Code. 30. Which of the following is an element of all legal contracts, including insurance contracts? (A) Indemnity (B) Insurable interest (C) Legality of object (D) Utmost good faith 31. In a legal contract, consideration (A) is always required with respect to contracts given under seal. (B) is evidence that the parties intended to be bound by the contract. (C) is the judgment exercised by the contracting parties prior to entering into the particular contract. (D) must be adequate with respect to the value of the contract as between the contracting parties. 32. The actual cash value of an item of property that has been lost or destroyed can be described as the (A) original purchase price of the item. (B) replacement cost of the item at the time of loss. (C) value of an equivalent item of the same age and condition. (D) value of the item to the insured at the time of loss. 33. In insurance terminology, risk is (A) an event that may give rise to a loss. (B) speculative in nature. (C) the equivalent of hazard. (D) the possibility of loss. continued on next page

7 Pure risk (A) entails no chance of profit. (B) is speculative in nature. (C) is the equivalent of peril. (D) is the type of risk that insurers will usually decline. 35. In a stock insurance company, the Board of Directors is responsible to the (A) Chairman of the Board. (B) Chief Executive Officer (CEO). (C) President. (D) shareholders. 36. The Supreme Court of Canada (A) hears appeals only in cases against the Crown. (B) is the final court of appeal from appeal divisions of provincial supreme courts. (C) only deals with matters it considers to be constitutional issues. (D) only handles matters that fall under federal jurisdiction. 37. The proximate cause of a loss is the (A) effective cause in a chain of events leading to the loss. (B) final cause in a chain of events leading to the loss. (C) first cause in a chain of events leading to the loss. (D) remote cause in a chain of events leading to the loss. 38. Subrogation is (A) related to the principle of indemnity. (B) the contribution an insured has to make towards the loss. (C) the right of the insurer to take action against the insured in the case of fraud. (D) the right to any salvage. 39. A retrocession occurs when (A) a reinsurer accepts a reinsurance. (B) a reinsurer cedes part of a reinsurance. (C) a reinsurer terminates a reinsurance. (D) an insurer cedes a reinsurance. 40. Which of the following organizations works towards achieving better computer communication between brokers and insurers? (A) Centre for Study of Insurance Operations (B) Facility Association (C) Insurance Brokers Association of Canada (D) Insurers Advisory Organization (2 marks each = 80 marks)

8 -8- Section B: Narrative Questions Question 2. (a) Explain fully how the law of averages (law of large numbers) and the theory of probability are applied in the ratemaking process. In your answer, describe THREE (3) factors upon which the reliability of predictions is dependent. (b) Identify and briefly describe the FIVE (5) factors upon which successful agency/brokerage production depends. (10 marks) (10 marks) Question 3. (a) Briefly explain the TWO (2) meanings of exposure as it relates to insurance. (b) Distinguish between substantive law and procedural law. (c) Contrast a void contract with a voidable contract. (d) What are the usual rules regarding the assignment of insurance policies? What are the common exceptions to these rules? (8 marks) Question 4. (a) Identify the THREE (3) main purposes of statute law, and give an example in each case. (b) One of the basic elements of a legal contract is agreement (offer and acceptance). Discuss each of the following related points: (i) Communication of an offer (ii) Acceptance of an offer (iii) Counter-offer (iv) Lapsing or revocation of an offer (c) Contrast a contract of indemnity with a contract of compensation. (6 marks) (2 marks) (2 marks) (3 marks) (3 marks) Question 5. (a) What is consideration and what is its importance? What constitutes consideration and when is it not essential? (b) Contrast misrepresentation with non-disclosure, and give an example of each. (c) Contrast a valued contract with a replacement cost contract. (d) Contrast a warranty with a representation, and give an example of each. continued on next page

9 -9- Question 6. (a) Contrast a first party loss with a third party loss. (b) Distinguish between prescription and statute of limitations. (c) Distinguish between waiver and non-waiver agreement. (d) Describe the principal functions of the Vehicle Information Centre of Canada (VICC). (e) Describe the principal functions of the Centre for Study of Insurance Operations (CSIO). Section C: Application Question Question 7. (a) For each of the following, indicate whether or not a risk is present and explain why or why not: (i) Hail for the farmer with standing crops (ii) Genetic defect (for a newborn male) that affects 9 males out of 10 in a family (iii) Rusting of a metal structure (iv) Death of an individual (v) Losing money at the casino (2 marks each = 10 marks) (b) Temporary insurance has been arranged, and issued without a termination date, while the underwriter completes the study of the case. After analyzing everything, the underwriter telephones the broker to advise that the temporary insurance is no longer valid as this is not the type of risk the company wishes to insure. Explain whether this was a valid termination notice. (c) During the investigation of a claim, a staff adjuster realizes that the claim may not be covered. However, he decides not to tell the insured, hoping to find other details that will confirm his first impression. Later, the insurer officially notifies the insured that the policy does not apply to this loss. Unfortunately, the insured has already started the repairs. What is the legal position of the insurer? Explain why.