Insurance General Insurance 5

Question 1

What is 'reinsurance' and why do insurers purchase it?

Accepted Answer

Insurance purchased by an insurer to protect itself against catastrophic losses

Answer

Reinsurance is insurance that insurers buy from other companies to limit their exposure to large or catastrophic losses, stabilizing their financial position.

Question 2

Under the principle of indemnity, what is the maximum amount an insurer should pay on a covered loss?

Accepted Answer

An amount that restores the insured to their pre-loss financial position, not more

Answer

The principle of indemnity holds that insurance should restore the insured to their financial position before the loss — no profit, no shortfall.

Question 3

Which type of insurance policy is typically required by lenders when a borrower finances a vehicle?

Accepted Answer

Collision and comprehensive coverage

Answer

Lenders require collision and comprehensive coverage to protect their financial interest in the vehicle while the loan is outstanding.

Question 4

What does 'pro rata cancellation' mean in insurance?

Accepted Answer

The insurer refunds the unearned premium proportional to the remaining policy period with no penalty

Answer

Pro rata cancellation returns the exact unearned portion of the premium for the remaining policy period without any penalty or short-rate charge.

Question 5

Which of the following is an example of 'adverse selection' in insurance?

Accepted Answer

High-risk individuals disproportionately seeking insurance, driving up costs for the pool

Answer

Adverse selection occurs when people with higher-than-average risk are more likely to purchase insurance, creating an imbalanced, costly risk pool.

Insurance Practice Test

Insurance Practice Test

Insurance General Insurance 5