INSURANCE TYPICAL EXAMINATION QUESTIONS AND ANSWERS.
1. Explain the term “pooling of risk” [10]
-many people join an insurance company
- The pay premiums into a common fund
- When loss occurs insurer draws money from the pool of funds
- The remainder from the pool is invested
- The insurance company makes profit from funds in the pool.
- Burden of loss is shared among members
- All members help the unfortunate member
2. Distinguish between insurable and non-insurable risk
Insurable Non insurable
Is pure risk because it results in loss only Is speculative which means it can result in
loss or profit
Have past consistent records Have no past consistent records
Can be assessed Cannot be assessed
Probabilities can be calculated Probabilities cannot be calculated
A fair premium can be fixed A fair premium cannot be fixed
Can be insured Cannot be insured
3. Identify any two non-insurable business risk [2]
War
Bad management
Changes in fashion
Poor public relations
4. Identify 3 types of assurance policies
Funeral assurance
Wholelife policy
Endowment policy
Retirement annuity assurance
Educational plan
Mortgage guarantee policy
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5. Outline factors considered when fixing insurance premiums
Value of property
Geographical location
Size of people or number of people insuring risk
Type of risk
Profits made by insurer
Age of property
6. State two communal systems of insurance and assurance
Zunde ramambo
Burial society
7. State three principles of insurance [3]
Utmost good faith
Insurable interest
Indemnity
Proximate cause
8. Explain the principle of utmost good faith [4]
Answer all questions truthfully or honestly
Insurer or insured must disclose all relevant facts on the proposal form
Failure to provide information makes contract void
Allow assessment of risks
Accurate information helps to fix a fair premium and fair compensation
9. Explain the principle of proximate cause [4]
This is the immediate cause of the event insured and must be covered for a claim
to be successful.
If you insure yourself against death by accident but while driving you die from
heart attack you cannot be compensated.
Indemnity doctrines involve the average clause, subrogation, contribution and
proximate cause.
10. Explain the following insurance terms
a. Premium [4]
A payment into a central pool made by each member
Payment is made at regular intervals
Fixed amounts are paid
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Premium depends on the value of property( see factors considered when
fixing a premium)
The premium is a percentage of the amount insured
b. Indemnity [8]
Seeks to restore the insured the insured to the former position before the
risk occurred
Compensation is paid to the insured after the loss has occurred
Ensures the insured does not make a profit out of a loss
Does not apply to life assurance as life cannot be adequately compensated
Uses :
o Subrogation
o Contribution
o Average clause
11. Benefits of assurance policies
Sum assured paid on maturity or death
Offer disability benefits
May waiver future premiums on disability
May pay out benefits
A form savings
Sum assured may be reinvested
Provides for old age
Can be used as collateral security
Caters for dependents
Gives confidence
A form of investment
Gives tax relief
Provides funeral assistance
12. Importance of insurance to a trader [10]
Insurance is important because it provides cover against:
Theft
Fire
Public liability
Employer’s liability
Consequential loss
Bad debts
Burglary
It provides:
marine insurance
plate glass
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fidelity guarantee
pluvius
goods in transit
motor vehicle insurance
restore insured / compensates insured
instils confidence in traders
help traders reduce risks
13. Explain the principle of insurable interest [5]
Insured must directly suffer loss if risk occurs
One can insure one’s own property
Prevents one from insuring property of another since one has no ownership of rights
over another’s property.
If a person insures someone else’s property they may be tempted to deliberately cause
the risk to occur in order to make profit.
14. Describe the steps taken to obtain an insurance policy [7]
Contact an insurance company or obtain prospectus
Discuss risk to be insured
Obtain a quotation
Complete a proposal form in utmost good faith
The insurance company assesses the proposal form
A premium is fixed
If cover is accepted a premium is paid
A cover note is issued
A policy is late issued
15. A sewing machine valued at $20 000 was insured for $15 000 against the risk of theft. Later
the machine was stolen. Explain why the insured received $ 15 000 as compensation.
The sewing machine was under insured by $5000
In accordance with the principle of indemnity and average clause
The owner should be restored to the former position of $15 000
The insured should not make a profit
Only the insurance company should make profit
The owner was his own insurer for $ 5000
16. Why would a trader apply for insurance cover against the risk of consequential loss
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Consequential loss is needed because a trader may have to close down in the event of
fire
It covers loss of profits during the time a firm is temporarily closed
Insurance pays out expenses such a rent, wages and the expenses of restoring the
business
17. Explain the following terms as used in Insurance.
a. Embezzlement of funds – fidelity guarantee
Taken out by the employer
It covers against dishonesty of employees who hands money
Provides security to employer against embezzlement of funds
Insurer (insurance company) restores money stolen by the employee if
convicted in the courts of law
b. Injury to customers – Public liability
Taken by the employer
Cover claims made by the public who get injured within a firm’s premises, for
example a customer injured by a falling shelf.
Business is indemnified.
18. How does the export credit guarantee corporation assist exports
Covers risk of non-payment by importers as a result of:
o War outbreak
o Political instability
o Lack of foreign currency
Provides specific policies
Compensates if importer defaults
Guarantees payments by banks
Finances exporters in the interim
Collects overdue debts
Monitors importers risk change
Provides advice to exporters
Assess credit worthiness of overseas buyers
19. Give reasons for the formulation of the National Social Security Authority (NSSA) [10]
National Social Security Authority (NSSA) is a statutory bodyproviding mandatory social
security schemes to:
o Reduce poverty at old age and promote health and safety at the work place by
providing cover against :
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Sickness or medical aid assistance
Injuries at work
Invalidity
Retirement
Death or funeral grant
In rehabilitating injured employees and help them return to work or train
self-reliant skills.
To collect contributions through a defined scaled premium where equal
monthly contributions are made by both the employer and employees
To administer social security and pension schemes and invest in the funds
Pay benefits in the form of grants (once of payment)
Or a pension on a monthly basis
Provide workmen compensation
Pay benefits to beneficiaries
20. Explain how a worker benefits from the invalidity pension grant offered by the National
Social Security Authority (NSSA)
Compensation
Rehabilitation
Training on self- reliant skills
Monthly benefits
21. Whole life policy [10]
Covers life for sum assured
The premiums are paid at regularly up to an agreed time
The sum assured matures at the time of death
Premium is based on age
The sum assured is paid to beneficiaries
All premiums must have been paid for the beneficiary to get paid
22. Endowment policy [10]
Combines savings scheme and life assurance
Taken for a specific period of time
Premiums are paid up at the the end of a given period or upon the death of the assured
Amount assured is paid on death or maturity whichever comes first
If the assured dies before maturity date, the sum assured is paid to his or her
dependents
Can be used as collateral security
Can be with profits or without profits
23. What information is required on a proposal form [8]
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Personal deatails of the person seeking insurance including
Name
Addres
Name of item to be insured
Name of the insured
Geographical location of the item
Date of birth
Occupation
Income/ salary
Marital status
Sex
Telephone number
Additional Relevant information about the item and the insured
Sum insurred or assured
Value of item insured
Risk to be insured
Names and addresses of beneficiaries
Declaration by insured / assured
Date and signature
24. Give the functions of a broker [6]
Acts as the link between the insurance company and a person seeking insurance cover
Gathers information on insurance companies or policies they offer
Give expert advice to prospective policy holders
Obtains several quotations from different insurance companies
Assists clients with filling of proposal forms
Effects a policy for clients after receiving the first premium
Assists clients in claiming compensation
Arranges or provides reinsurance for clients
25. A house valued at $50 million was insured against fire for $40 million. it was partly damaged
by fire and the cost of repairs and the cost of repairs was $20 million. Explain why the
insurance company paid $16 million.
The doctrine of average clause would apply
The house was under insured
There was a partial loss
According to the principle of indemnity one must not make profit out of a loss
The insured becomes own insurer for uninsured portion of the house
26. What steps would be taken when making a claim [6]
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Obtain police report
Contact insurance company or broker
Complete claim form in utmost good faith
Company checks form against provisions of the agreement to see if there no
breach of contract
The loss is assessed and the amount of compensation is calculated
Compensation is paid according to the principle of proximate cause , indemnity
etc
27. Explain the following terms used in insurance
a. Fidelity guarantee [4]
Taken out by employer
Covers the employer against dishonest employees who handle cash
Covers against embezzlement of funds
Employer is only compensated if employee is convicted
b. Public liability [4]
Taken out by business owners
Covers members of the public against injury or death which occurs at
insured s premises due to the business owners negligence
Eg a shopper who is injured by falling shelves
28. Describe the following types of insurance
i. Fire insurance[5]
Covers property against loss or damage by fire from electrical faults,
lightning, thunderbolts inflammable fluids and veld fires
Additional premiums are charged for consequential loss
ii. Public liability ( see question 27)
iii. Home owner’s insurance policy [5]
Covers home owners against home losses such as
Falling trees
Storms
Floods
Lightning
Thunderbolts
Burglary
Fire
Riot, malicious damage to buildings
Accidental brekages of fixtures and fittings
Bursting of pipes or escape of water
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Earthquakes
iv. Pluvius policies [5]
Covers organizers of outside events
Covers against disturbances by rain or storm
Covers events such as parties, fetes, matches, fundraising events, agricultural
shows
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