BCP General Insurance Principles 2 — Questions and Answers
Question 1: What is meant by 'material fact' in the context of insurance disclosure?
- Any fact that makes the premium cheaper
- Any fact that would influence a prudent insurer's decision to accept the risk or set the premium (Correct answer)
- Facts only about the insured's health
- Facts already known to the insurer
Correct answer: Any fact that would influence a prudent insurer's decision to accept the risk or set the premium
A material fact is any information that would influence a prudent insurer in deciding whether to accept a risk and on what terms. All material facts must be disclosed at inception and renewal.
Question 2: What is 'average' in the context of property insurance?
- The average premium paid over 5 years
- A condition that reduces claims proportionally when underinsurance exists (Correct answer)
- The average value of all insured items
- A method for calculating depreciation
Correct answer: A condition that reduces claims proportionally when underinsurance exists
The 'average' condition (or pro-rata condition of average) applies when property is underinsured. The claim payment is reduced proportionally: (sum insured / actual value) × loss amount.
Question 3: Which of the following best describes 'moral hazard' in insurance?
- Physical dangers associated with a risk
- The tendency of insured persons to be less careful because they are covered (Correct answer)
- The risk that an insurer goes bankrupt
- The risk of fraudulent claims by agents
Correct answer: The tendency of insured persons to be less careful because they are covered
Moral hazard refers to the tendency of insured persons to take less care to avoid or minimize losses because they know they are covered by insurance, increasing the likelihood of claims.
Question 4: What is 'reinstatement' as a basis of settlement in property insurance?
- Returning a cancelled policy to active status
- Restoring or replacing damaged property with new equivalent property (Correct answer)
- Paying the depreciated value of damaged items
- Settling claims in instalments
Correct answer: Restoring or replacing damaged property with new equivalent property
Reinstatement as a basis of settlement means the insurer pays the cost of repairing or replacing the damaged property with new equivalent property, without deduction for depreciation.
Question 5: What does 'sum insured' represent in a general insurance policy?
- The total premiums paid over the policy period
- The maximum amount the insurer will pay in the event of a total loss (Correct answer)
- The current market value of the insured property
- The replacement cost plus profit margin
Correct answer: The maximum amount the insurer will pay in the event of a total loss
The sum insured is the maximum amount the insurer will pay in the event of a total loss under the policy. It should represent the full value of the insured item at risk.
Question 6: What is a 'warranty' in an insurance contract?
- A guarantee that premiums will not increase
- A condition that must be strictly complied with, breach of which allows the insurer to avoid the policy (Correct answer)
- A promise by the insurer to pay all claims
- A certificate confirming insurance coverage
Correct answer: A condition that must be strictly complied with, breach of which allows the insurer to avoid the policy
A warranty in an insurance contract is a condition that must be strictly and literally complied with. Breach of warranty entitles the insurer to avoid liability, even if the breach is unrelated to the loss.
BCP General Insurance Principles 2
What is meant by 'material fact' in the context of insurance disclosure?