C11 Principles and Practice of Insurance Questions and Answers

Comprehensive Explanation (150–250 words):

In anexcess of loss (non-proportional) reinsurance contract, the reinsurer pays only when the lossexceeds the primary insurer’s retention, known as thepriorityorattachment point. In this question, the priority is$80,000. This means reinsurance doesnotrespond unless the loss exceeds $80,000.

Here, the actual loss is$60,000, which isbelowthe attachment point. Because the loss never reaches the $80,000 threshold, the reinsurer owesnothing. Theentire lossremains the responsibility of the primary insurer.

The reinsurer’s limit of $100,000 only becomes relevant if the loss exceeds $80,000, which is not the case here.

Therefore, the primary insurer pays100% of the $60,000 loss.

Correct answer:D.

A stock insurance company operates with the same capital structure as other conventional for-profit corporations. Ownership is represented by shares of stock, held by shareholders who supply capital and expect a return on investment. Profits are distributed as dividends or reinvested into the company. This structure aligns closely with traditional corporate financial frameworks in Canadian commerce.

Option B, a captive company, is owned by a parent business to insure its own risks—not structured like a general capital corporation. Option C, a co-operative company, is owned by its policyholders or members, not shareholders. Option D (factory mutual company) refers to a mutual insurer owned by its policyholders and requiring high loss-prevention standards.

Thus, the only insurer type that mirrors the capital structure of typical Canadian corporate enterprises is the stock company, making A correct.

In the structure of reinsurance practices explained inPrinciples and Practice of Insurance, aretrocessionaireis the reinsurer that accepts risk from another reinsurer. This occurs through a process calledretrocession, where a reinsurer (the retrocedent) transfers a portion of its assumed risk to another reinsurer to further spread exposure and maintain solvency stability.

The terminology is important:

Theprimary insurerissues the original policy to the insured.

Thereinsurer(cessionaire) accepts risk from the primary insurer.

When that reinsurer then cedes part of the risk again, the receiving party is theretrocessionaire.

Retrocession is essential in risk-management frameworks because it allows reinsurers to diversify exposures and avoid concentration risks from catastrophic events. Therefore, the correct term for the second reinsurer isC. Retrocessionaire.

When two insurers cover the same property, theprinciple of contributionapplies. Each insurer pays a proportion of the loss based on its share of the total insurance in force. Here:

Total insurance = $300,000 + $100,000 = $400,000

Insurer A’s share = 300,000 / 400,000 =75%

Insurer B’s share = 100,000 / 400,000 =25%

Loss = $80,000

Insurer A pays 75% × 80,000 =$60,000

Insurer B pays 25% × 80,000 =$20,000

Thus,Cis correct.

The Canadian property and casualty (P&C) insurance industry employs a range of specialized professionals who support the underwriting, claims, regulatory, and legal functions necessary for insurance operations. Lawyers are commonly employed directly by insurers to provide advice on policy interpretation, defend claims litigation, ensure regulatory compliance, draft contracts, and handle disputes. They play a crucial role in the claims process, particularly for liability claims and complex legal matters.

Mechanics, travel agents, and health professionals are not directly employed by the P&C insurance industry. Mechanics may work with insurers as third-party repair facilities, but they are not typically employees. Travel agents relate to travel services, not insurance employment. Health professionals may support life and health insurers or provide assessments for claims, but they are not ordinarily employed in theproperty and casualtysector. Therefore, the correct answer is A: Lawyer.

When apolicyholder(the insured) cancels a policy before its natural expiry date, insurers applyshort rate cancellation. Under short rate cancellation, the insurer refunds the unearned premiumminus a penalty. This penalty is applied because early cancellation disrupts expenses already incurred by the insurer, such as acquisition and administrative costs.

By contrast:

Pro rata cancellation (A)applies when theinsurercancels the policy — this provides the insured with thefullunearned premium refund, without penalties.

Half-term (B)is not a recognized cancellation method.

Partial-term (D)is also not an insurance cancellation method.

Thus, when the insured initiates cancellation, the correct method applied isshort rate.

Asubscription policyis used when a single insurance risk is too large for one insurer to assume alone. Multiple insurers participate in the policy, each taking a percentage of the risk. Because each insurer is directly responsible for its portion, the policy must besigned by each participating insurer, acknowledging its share of liability.

Option A, prescription, refers to legal limitation periods.

Option B, all-inclusive, is not a recognized type of policy requiring multiple insurer signatures.

Option D, subrogation, is a legal right—not a policy type.

Only thesubscription policyrequires signatures from all insurers involved, makingCcorrect.

Net income is calculated by subtractingexpensesfromrevenues:

Net Income=Revenues−Expenses\text{Net Income} = \text{Revenues} - \text{Expenses}Net Income=Revenues−Expenses

For this retailer:

$250,000−$100,000=$150,000\$250{,}000 - \$100{,}000 = \$150{,}000$250,000−$100,000=$150,000

The projection of $50,000 sustained growth next year is irrelevant because the question asks specifically forlast year’snet income. Many insurance-based financial questions test the ability to isolate actual financial performance from future projections.

Options B, C, and D incorrectly combine revenue, expense, or growth figures.

Thus, the correct net income isA: $150,000.

Insurable interest exists when someone would suffer a financial loss if a person or property were damaged, lost, or deceased. Employers have a legitimate, recognized insurable interest in the lives of key employees, as their death or disability could result in financial loss—for example, reduced productivity, training costs, or loss of specialized expertise. Therefore, A represents a valid and legally recognized insurable interest.

Option B involves investment income earned by insurers—this is not an insurable interest but a financial outcome of operations. Option C reflects a business motive but not an insurable interest because an underwriter does not stand to personally lose financially if a policyholder dies or property is damaged. Option D is generally invalid unless the employee can demonstrate a direct financial dependency, which is typically not the case.

Thus, the only clear example of insurable interest is A: the employer’s interest in the life of an employee.

To calculate premiums rated per $100 of insurance, the formula is:

Premium = (Amount of Insurance ÷ 100) × Rate

Step-by-step:

$500,000 ÷ 100 = 5,000 rating units

5,000 × $0.80 =$4,000

Thus, the annual premium for the building is$4,000, makingOption Cthe correct answer.

Option A is too low, while Options B and D do not match the rating calculation. Underwriters rely on these standardized rating methods to ensure consistent and adequate premium development.

Unearned premium is the portion of the premium that corresponds to the period of insurance not yet elapsed. When an insured prepays a premium (often for a 12-month policy), the insurer earns that premium gradually over the policy term as time passes. Any amount relating to future coverage—coverage the insurer has not yet provided—is considered unearned premium. It represents a liability on the insurer’s balance sheet because if the policy is cancelled, the insurer must refund the unearned portion to the insured, subject to policy terms.

Option A is the opposite: that describes earned premium, not unearned premium. Option B is incorrect because unearned premium is unrelated to claims payments; it is a time-based accounting concept. Option D is incorrect because broker commissions are not part of earned or unearned premium calculations; they are an expense paid out of the premium.

Therefore, the correct definition is C: the premium for the remaining period of insurance that has not yet passed.

Pre-loss objectives in risk management are goals an organization aims to achievebeforeany loss occurs. These objectives focus on minimizing the frequency and severity of losses, ensuring preparedness, and maintaining organizational functionality.

Operational continuityis a key pre-loss objective because it emphasizes having systems, controls, and procedures in place to ensure that operations run smoothly—even when risk exposures are present. This includes safety programs, maintenance schedules, compliance measures, and contingency planning. Operational continuity ensures the business can withstand or avoid disruptions.

Option A (external obligations) is vague and not formally defined as a risk management objective.

Option B (sustained growth) and D (business development) arebusiness goals, not pre-loss risk management objectives.

Thus, the correct answer isC: Operational continuity.

Brokers are legally and ethically required to keep premiums in a trust account, separate from operating funds. These trust monies belong to insurers (or insureds, depending on the context) until remitted. Misusing trust funds—such as using them to pay operating expenses—is considered a serious breach of fiduciary duty and a violation of insurance regulatory requirements. Such conduct jeopardizes financial integrity and can lead to immediate termination of the broker contract, regulatory sanctions, or license revocation. Therefore, option D reflects a valid and serious reason for terminating the agreement.

Option A concerns underwriting rules, not broker misconduct. Option B actually reflects good insurer service, not grounds for termination. Option C is incorrect because brokers do not owe commissionstoinsurers—insurers pay commissionstobrokers. The broker’s responsibility is to remit collected premiums, not commissions.

Thus, the only option representing a breach serious enough to terminate an agency contract is D.

Abrokeris an independent insurance intermediary who represents theinsured, not the insurer, yet also interacts professionally with insurers to place coverage. Brokers typicallyown their client lists, have the freedom to place business with multiple insurers, and earn income throughcommissionsonce policies are sold or renewed. They are obligated to provide impartial advice and ensure clients receive suitable coverage.

Underwriters (option B) do not own client lists and do not earn commissions; they work for insurers evaluating risks. Exclusive agents (option C) representone insurer onlyand generally do not own their book of business. Independent adjusters (option D) investigate and adjust claims—they do not sell insurance nor hold client lists.

Orianna’s described attributes—ownership of clients, acting for both parties, and earning commissions—match precisely the role of abroker, makingAcorrect.

In insurance law, the insurer bears the burden of proving that the insured failed to disclose a material fact. Material facts are those that would influence an underwriter’s decision to accept, rate, or decline the risk. If an insurer alleges concealment or misrepresentation, the onus lies with the insurer to establish—through underwriting evidence, policy documentation, and testimony—that the fact was material and that nondisclosure affected the insurer’s judgment.

Option A is incorrect because the broker is merely an intermediary. Option C is not correct because the insured’s role is to answer questions truthfully, but the legal burden of proof in court rests with the insurer when making the accusation. Option D, a third party, has no role in proving concealment.

Therefore, the insurer must satisfy the court that a material concealment occurred, making B correct.

Under contract law principles referenced inPrinciples and Practice of Insurance, a contract is only valid when both parties givefree, informed, and genuine consent. Fraud occurs when one party intentionally misleads another through deception, false representation, or concealment to induce consent. In this scenario, John intentionally misrepresented the nature of the accommodation—promising his private residence while intending to place Louise in a different, inferior property.

Because Louise agreed based on amaterial misrepresentation, the contract is voidable due tofraud, meaning she can invoke nullity and have the contract deemed without effect. Fraud differs from error in that the misinformation wasdeliberatelycreated by John. It is not lesion (which relates to unfair disadvantage in value) nor violence (which involves physical or psychological coercion). Therefore, the correct answer isB. Fraud.

In pro rata (proportional) reinsurance, the reinsurer assumes a fixed percentage of both the risk and the premium, and in return pays the same percentage of any losses. Here, the insurer cedes 25% of the risk to the reinsurer. Therefore, the reinsurer must contribute 25% of any loss that occurs on that policy.

The loss amount is $100,000.

Reinsurer’s share = 25% × $100,000 = $25,000.

The insurer retains the remaining 75%, or $75,000. Proportional reinsurance helps insurers manage exposure by sharing both costs and losses. Options B, C, and D do not correctly reflect proportional-sharing principles. The reinsurer does not pay the full loss; it only pays its agreed percentage.

Thus, the correct answer is A: $25,000.

Comprehensive and Detailed Explanation:

The principle of insurable interest is fundamental to insurance contracts and is essential for the validity of an insurance policy. Insurable interest exists when the insured stands to suffer a financial loss if the insured property is damaged, destroyed, or if the insured person is injured or dies. This principle ensures that insurance contracts are not used for speculation or gambling, which would be contrary to the purpose of insurance.

According to established insurance principles reflected in the Insurance Institute of Canada’s Principles and Practice of Insurance, insurable interest must exist at the time of loss for property and liability insurance. For life insurance, insurable interest must exist at the time the policy is taken out. Without insurable interest, an insured would have no legitimate reason to purchase insurance, and the policy could be declared void.

For example, a homeowner has an insurable interest in their house because they would suffer a financial loss if it were damaged by fire. Similarly, a business has an insurable interest in its inventory and equipment. In contrast, a person cannot insure a stranger’s property because they would not experience a financial loss if that property were damaged.

This principle protects insurers from moral hazard and ensures that insurance remains a mechanism for risk transfer and financial protection, rather than a means of profit. Therefore, the correct answer is B. Insurable interest.

In Canadian insurance law,statutory conditionsapply differently depending on the class of insurance:

Fire insurance policiescontainStatutory Conditionsunder provincial Insurance Acts.

Accident & sickness policiescontainStatutory Conditionsspecific to health and travel insurance.

Automobile insuranceincludesStatutory ConditionsorGeneral Conditions(depending on the province).

The table shown in your image lists headings:

A: Rights of examination,B: Action,C: Prohibited use by insured.

These correspond directly to statutory condition categories found infire insuranceandaccident & sickness insurance, not automobile.

The correct ordering is:

A = Fire,B = Accident & Sickness,C = Automobile.

This matches optionB.

A commercial property floater is designed for businesses that regularly transport goods, equipment, or samples away from their main premises. In this case, MacMan Inc.’s traveling sales staff carry product samples across Canada. These samples are considered business property, not personal property. Therefore, they must be insured under a commercial floater, which provides coverage regardless of location—hotel rooms, vehicles, trade shows, or customer visits.

Option C, personal property floater, applies toindividualproperty such as jewelry, fine arts, or sporting goods, not business merchandise. Option A, aviation insurance, is irrelevant unless aircraft are owned or used by the business for transport. Option B, accident insurance, covers personal injuries, not physical property.

Because the exposure involves business-owned goods off-premises, the correct coverage is the commercial property floater. It ensures protection against theft, loss, or damage while the goods are in the custody of traveling employees.

Intermediaries—such as brokers and agents—play an essential role in helping consumers navigate insurance products. One of their primary functions is toidentify the client’s needs, assess exposures, and recommend suitable insurance solutions. This includes advising on appropriate limits, optional coverages, deductibles, and risk management considerations. This consultative role is fundamental to the value they provide.

Option A is incorrect because brokers representmultiple insurersbutnot all insurers; agents often represent only one. Option B is incorrect—intermediaries do not have unlimited liability; their liability relates to negligence or errors in service. Option D is incorrect—reinsurance arrangements are made between insurers and reinsurers, not individual clients. Therefore, the correct reason a policyholder uses an intermediary isC.

Insurers in Canada are heavily regulated in the way they invest their capital because they must remain financially strong to pay future claims. Government regulations—federal for federally regulated insurers and provincial for provincially regulated insurers—set out specific investment restrictions, including prohibiting certain high-risk or illiquid investments. These rules protect policyholders by ensuring insurers maintain solvency and liquidity.

Insurers must invest prudently in order to meet long-term obligations, and therefore regulators specify the classes of investments deemed too risky or unsuitable. This includes limits on speculative investments or holdings that could jeopardize stability.

Option A is incorrect because insurers arenotrequired to invest in non-liquid assets; in fact, liquidity is important.

Option B is incorrect; although some foreign investments may be allowed, the statement is not a broad principle of regulation.

Option C is incorrect because insurers face significant restrictions, not complete freedom.

Thus, D is the correct answer.

The typical privacy-breach response sequence used in Canadian insurance organizations follows four steps:

Contain the breachand secure the data (stop further exposure).

Evaluate the risks— determine sensitivity of data, potential harm, affected individuals, and severity.

Notifythose who must be informed (affected clients, regulators, privacy commissioners, insurers, or law enforcement).

Prevent recurrence— investigate causes and implement corrective measures.

Since Step 1 is containment and Step 2 is risk evaluation, thethirdstep isnotification.

Therefore, the correct answer isC.

Comprehensive Explanation (150–250 words):

When a vehicle is deemed a total loss, the insurer typically pays theactual cash value (ACV)minus thedeductible. If the insured decides to keep the salvage, thesalvage valuemust also be deducted from the settlement, because the insured retains something of monetary worth.

The formula for this situation is:

Settlement=ACV−Deductible−Salvage Value\text{Settlement} = \text{ACV} - \text{Deductible} - \text{Salvage Value}Settlement=ACV−Deductible−Salvage Value

Using Ivana’s numbers:

ACV = $17,000

Deductible = $1,500

Salvage value = $3,000

17,000−1,500−3,000=12,50017,000 - 1,500 - 3,000 = 12,50017,000−1,500−3,000=12,500

Therefore, Ivana receives$12,500, and she keeps the damaged vehicle, which she values for personal reasons.

Option B ($14,000) ignores the salvage deduction.

Option C ($15,500) ignores the deductible.

Option D ($17,000) ignores both deductible and salvage, which is not permitted.

The only correct settlement amount is$12,500.

Asurety bondis a three-party contract in which the surety guarantees the performance of a contractor (principal) for the benefit of a third party (obligee). In construction, a developer may require a contractor to post aperformance bondensuring the project will be completed as agreed. This is the classic example of suretyship.

Option A is banking, not surety.

Option B is liability insurance, not a three-party guarantee.

Option D involves marine or cargo insurance, not a performance guarantee.

Thus,Ccorrectly describes a surety situation.

The coinsurance clause requires the insured to carry insurance equal to a specified percentage (commonly 80%, 90%, or 100%) of the property's value. If the insured carries less than the required amount, they become a coinsurer and share in any partial loss. This prevents underinsurance and encourages insureds to maintain adequate coverage levels.

Here, Deanna insures a $1,000,000 property for only $500,000—50%. If the policy requires 80% coinsurance, she should be carrying at least $800,000. Because she does not, she will not be fully reimbursed for partial losses; her payment will be reduced proportionally based on the coinsurance formula.

Option A (forfeiture) applies to breaches of policy conditions. Option C (contribution) applies when multiple insurers cover the same risk. Option D (subscription) applies when several insurers share a single risk by percentage participation.

Thus, the clause that could reduce Deanna’s recovery is B: Coinsurance.

Apolicyis a legal contract issued by theinsurer, not the broker and not the policyholder. Therefore, the individuals who sign the policy are usually the insurer’s authorized signing officers.

These are typically:

The CEO or President, and

Another authorized senior officer, such as the Administrative Manager or Underwriting Officer.

In the table:

Cathy(CEO) is an authorized signer.

Alan(Administrative Manager) is also an authorized insurer representative.

The insured (Simone) doesnotsign the actual policy document; their signature is not required for the policy to be valid. The broker (Denis) also doesnotsign policies; he facilitates placement but is not a party to the contract.

Thus, the correct pair isAlan and Cathy.