Fundamentals of Insurance - Licensing Practice Exam 2
The major function of insurance is to achieve a spread of risk. Explain what is meant by spread of risk.
Correct Answer: the major function of insurance is to share the losses of the few among the many
What are the five functions of insurance? Correct Answer: 1. spread of risk (major function)
2. basis of credit system
3. eliminates worry and encourages entrepreneurship
4. loss prevention and loss reduction
5. source of employment and investment capital
An analysis of the definition of insurance reveals five important points. Identify them and provide a brief
explanation for each. Correct Answer: 1. insurance provides a means of shifting one's financial
responsibility for a loss to another party
2. payment will be made only in the event of the happening of a certain risk or peril
3. the amount of payment is restricted to the amount required to indemnify the insured
4. insurance covers losses to which the object of insurance *may* be exposed
5. the indemnity provided can be in the form of a sum of money or other thing of value
Define risk. Correct Answer: the chance of financial loss to which the object of insurance may be
exposed
Define peril. Correct Answer: the cause of loss
What are the three types of property and casualty insurance in Canada?
What is another name for this type of insurance? Correct Answer: automobile insurance
property insurance
liability insurance
There are two major types of insurers. Identify them and provide examples of organizational differences.
Correct Answer: private insurers
government insurers
What are the two most common types of private insurers? Provide a brief explanation of them both.
(money and main goal) Correct Answer: (a) stock companies
-money to operate a stock company may come from private funds or through public sale of stock
-ownership rests in the hands of the company's shareholders whose main purpose is to derive a profit
from their investment
(b) mutual companies
-money made is refunded to policyholders directly through dividends or through subsequent rate
adjustments
-main goal is to provide policyholders with insurance at as low of a cost as possible
Which types of insurance are government insurers most often involved with? Correct Answer: medical
insurance, employment insurance, workers' compensation, compulsory automobile insurance
,Identify two methods used by insurers to sell their products. Correct Answer: direct writing system
independent brokerage system
Explain how direct writing system deals with:
(a) remuneration
(b) ownership of client files
(c) administration functions Correct Answer: (a) either salary or commission or both
(b) insurer owns all of the business
(c) insurer performs all administrative functions
Explain how independent brokerage system deal with:
(a) remuneration
(b) ownership of client files
(c) administration functions Correct Answer: (a) brokerage is paid commission by insurer which pays
costs, salaries, rent
(b) brokerage owns business it produces
(c) brokerage responsible for providing policyholders with a number of client services
Of the two distribution methods, which is the most common? Correct Answer: independent brokerage
system
Chapter 2 Correct Answer: Insurance Contracts
Identify three major categories of insurance needs/ risk. Correct Answer: personal risk
property risk
liability risk
Identify four options an insured may use in dealing with risk.
Which of these options is the least practical? Correct Answer: avoidance of risk
controlling of risk
retention of risk
transfer of risk
avoidance is least practical, transfer is most practical and popular
There are two types of risk. Identify them and provide a brief description for each.
Of these types of risk, which are insurable? Correct Answer: speculative risk: the possibility of either
financial loss or gain
pure risk: the chance of financial loss with no chance of financial gain
only pure risk is insurable
Define contract. Correct Answer: an agreement between two or more parties which is enforceable at
law
Identify the five elements required to be present in all contracts.
, Identify the three additional elements which are unique to insurance contracts and which must be
present if an insurance contract is to be enforceable at law. Correct Answer: agreement
consideration
legality of object
legal capacity of the parties to contract
genuine intention
insurable interest
utmost good faith
indemnity
In the insurance business, it is common for brokers to "bind" an insurer on a risk.
Explain. Correct Answer: the broker has committed the insurer to provide a contract of insurance on the
subject matter under discussion
Identify two documents or sources which brokers can refer to in order to determine the extent of
"binding authority" given to them. Correct Answer: agency agreement
insurer's rate manual
Identify three types of insurance forms used by insurers to make changes to an existing policy.
State the purpose of each of these forms. Correct Answer: endorsements or riders: a change in the
terms of the contract, like change in limits or deleting or adding exclusion or adding coverage
floaters: to provide coverage for property having a high degree of mobility
separate policies: additional coverage that original policy does not cover, also doesn't have to be issued
by original insurer
Persons considered to be competent to contract are said to have this... while a minor does not. Correct
Answer: legal capacity
People who are able to show that they would suffer financially by a loss are said to have this. Correct
Answer: insurable interest
Is said to exist where an unconditional acceptance of an offer has been made. Correct Answer:
agreement
A part of all insurance contracts which attempts to provide insureds with the actual amount of their
loss... no more and no less. Correct Answer: indemnity
Is an exchange of something of value. Correct Answer: consideration
Is present when it can be shown the contract was not affected by fraud, duress, concealment or
mistake. Correct Answer: genuine intention
The major function of insurance is to achieve a spread of risk. Explain what is meant by spread of risk.
Correct Answer: the major function of insurance is to share the losses of the few among the many
What are the five functions of insurance? Correct Answer: 1. spread of risk (major function)
2. basis of credit system
3. eliminates worry and encourages entrepreneurship
4. loss prevention and loss reduction
5. source of employment and investment capital
An analysis of the definition of insurance reveals five important points. Identify them and provide a brief
explanation for each. Correct Answer: 1. insurance provides a means of shifting one's financial
responsibility for a loss to another party
2. payment will be made only in the event of the happening of a certain risk or peril
3. the amount of payment is restricted to the amount required to indemnify the insured
4. insurance covers losses to which the object of insurance *may* be exposed
5. the indemnity provided can be in the form of a sum of money or other thing of value
Define risk. Correct Answer: the chance of financial loss to which the object of insurance may be
exposed
Define peril. Correct Answer: the cause of loss
What are the three types of property and casualty insurance in Canada?
What is another name for this type of insurance? Correct Answer: automobile insurance
property insurance
liability insurance
There are two major types of insurers. Identify them and provide examples of organizational differences.
Correct Answer: private insurers
government insurers
What are the two most common types of private insurers? Provide a brief explanation of them both.
(money and main goal) Correct Answer: (a) stock companies
-money to operate a stock company may come from private funds or through public sale of stock
-ownership rests in the hands of the company's shareholders whose main purpose is to derive a profit
from their investment
(b) mutual companies
-money made is refunded to policyholders directly through dividends or through subsequent rate
adjustments
-main goal is to provide policyholders with insurance at as low of a cost as possible
Which types of insurance are government insurers most often involved with? Correct Answer: medical
insurance, employment insurance, workers' compensation, compulsory automobile insurance
,Identify two methods used by insurers to sell their products. Correct Answer: direct writing system
independent brokerage system
Explain how direct writing system deals with:
(a) remuneration
(b) ownership of client files
(c) administration functions Correct Answer: (a) either salary or commission or both
(b) insurer owns all of the business
(c) insurer performs all administrative functions
Explain how independent brokerage system deal with:
(a) remuneration
(b) ownership of client files
(c) administration functions Correct Answer: (a) brokerage is paid commission by insurer which pays
costs, salaries, rent
(b) brokerage owns business it produces
(c) brokerage responsible for providing policyholders with a number of client services
Of the two distribution methods, which is the most common? Correct Answer: independent brokerage
system
Chapter 2 Correct Answer: Insurance Contracts
Identify three major categories of insurance needs/ risk. Correct Answer: personal risk
property risk
liability risk
Identify four options an insured may use in dealing with risk.
Which of these options is the least practical? Correct Answer: avoidance of risk
controlling of risk
retention of risk
transfer of risk
avoidance is least practical, transfer is most practical and popular
There are two types of risk. Identify them and provide a brief description for each.
Of these types of risk, which are insurable? Correct Answer: speculative risk: the possibility of either
financial loss or gain
pure risk: the chance of financial loss with no chance of financial gain
only pure risk is insurable
Define contract. Correct Answer: an agreement between two or more parties which is enforceable at
law
Identify the five elements required to be present in all contracts.
, Identify the three additional elements which are unique to insurance contracts and which must be
present if an insurance contract is to be enforceable at law. Correct Answer: agreement
consideration
legality of object
legal capacity of the parties to contract
genuine intention
insurable interest
utmost good faith
indemnity
In the insurance business, it is common for brokers to "bind" an insurer on a risk.
Explain. Correct Answer: the broker has committed the insurer to provide a contract of insurance on the
subject matter under discussion
Identify two documents or sources which brokers can refer to in order to determine the extent of
"binding authority" given to them. Correct Answer: agency agreement
insurer's rate manual
Identify three types of insurance forms used by insurers to make changes to an existing policy.
State the purpose of each of these forms. Correct Answer: endorsements or riders: a change in the
terms of the contract, like change in limits or deleting or adding exclusion or adding coverage
floaters: to provide coverage for property having a high degree of mobility
separate policies: additional coverage that original policy does not cover, also doesn't have to be issued
by original insurer
Persons considered to be competent to contract are said to have this... while a minor does not. Correct
Answer: legal capacity
People who are able to show that they would suffer financially by a loss are said to have this. Correct
Answer: insurable interest
Is said to exist where an unconditional acceptance of an offer has been made. Correct Answer:
agreement
A part of all insurance contracts which attempts to provide insureds with the actual amount of their
loss... no more and no less. Correct Answer: indemnity
Is an exchange of something of value. Correct Answer: consideration
Is present when it can be shown the contract was not affected by fraud, duress, concealment or
mistake. Correct Answer: genuine intention
