BCP - Basic Insurance Concepts and Principles Singapore Principles of Indemnity Questions and Answers

Question 1

A policyholder in Singapore insures their commercial property, valued at S$1,500,000, for only S$1,200,000. The policy includes a pro-rata condition of average. If a fire causes S$200,000 in damages, how much will the insurer be liable to pay, strictly based on this principle?

Accepted Answer

S$160,000

Answer

The principle of indemnity is subject to policy terms like the Average Clause. When a property is underinsured, the insurer is only liable for a proportion of the loss. The formula is: (Sum Insured / Value at Risk) x Loss. In this case, (S$1,200,000 / S$1,500,000) x S$200,000 = 0.8 x S$200,000 = S$160,000.

Question 2

Which of the following statements BEST describes the core objective of the principle of indemnity in Singapore's general insurance context?

Accepted Answer

To restore the policyholder to the approximate financial position they were in immediately before the loss occurred.

Answer

The fundamental purpose of indemnity is to provide compensation that places the insured in the same financial position they held just before the loss. The insured should neither profit nor be left worse off financially.

Question 3

A Singaporean art collector insures a specific painting under a 'valued policy' for an agreed sum of S$100,000. Due to a market downturn, its actual market value is S$85,000 when it is destroyed in a covered peril. How much is the insurer obligated to pay?

Accepted Answer

S$100,000

Answer

A valued policy is a modification of the principle of indemnity where the value of the subject matter is agreed upon by both the insurer and the insured at the inception of the policy. In the event of a total loss, this agreed amount is paid out, regardless of the actual market value at the time of loss.

Question 4

In property insurance in Singapore, what is the primary purpose of a 'Reinstatement Value Clause'?

Accepted Answer

To cover the cost of rebuilding or replacing the damaged property without any deduction for depreciation.

Answer

A Reinstatement Value Clause modifies strict indemnity by covering the cost to repair or replace the damaged property to a condition equal to, but not better than, when it was new. It specifically ignores depreciation that would normally be deducted in an indemnity settlement.

Question 5

Which of the following is NOT a standard method by which an insurer can provide indemnity to a policyholder after a valid claim?

Accepted Answer

Offering the policyholder shares in the insurance company equivalent to the loss value.

Answer

Insurers settle claims and provide indemnity through four common methods: cash payment, repair, replacement, or reinstatement. Providing company shares is not a recognised method of claim settlement as it does not directly restore the insured to their pre-loss financial position in the same manner.

BCP Insurance Practice Test

BCP Insurance Practice Test

BCP - Basic Insurance Concepts and Principles Singapore Principles of Indemnity Questions and Answers