FOI Final Exam Review UPDATED Exam Questions and CORRECT Answers
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FOI Final Exam Review UPDATED Exam
Questions and CORRECT Answers
Insurance - CORRECT ANSWER- Insurance is all about "risk sharing." Since earliest times,
people have demonstrated a willingness to pool their resources to help others in times of
need. Insurance is nothing other than the formal...
FOI Final Exam Review UPDATED Exam
Questions and CORRECT Answers
Insurance - CORRECT ANSWER- Insurance is all about "risk sharing." Since earliest times,
people have demonstrated a willingness to pool their resources to help others in times of
need. Insurance is nothing other than the formalization of the basic principle of risk sharing
into an organized facility. History suggests that as early as 5000 BC, Chinese boat operators
found it necessary to redistribute their cargoes to several boats as they approached
treacherous rapids on the rivers. If one boat was lost, all the boat owners shared the loss and
no one was wiped out. As overseas shipments increased between nations, merchants found it
impractical to deal with exposures in such an informal way. As a result, the marine insurance
industry was born. The birth of fire insurance is traced to London, England. In September,
1666, an oven fire originating in the King's bake shop nearly destroyed the entire city. The
next year, a London dentist began offering insurance against the risk of fire to selected
dwellings in London. Before long, other merchants also became engaged in the insurance
business. Within a few years, it became obvious that insurance was a full time business and
these merchants began to be replaced by full time insurance underwriters. Today there are
approximately 109 general insurance companies (other than life and health) in Canada. 10 of
these insurers provide over 67% of the insurance purchased by Canadians.
Five functions of insurance - CORRECT ANSWER- Spread of risk, basis of credit system,
eliminates worry (encourages entrepreneurship), loss prevention and loss reduction, and
sources of employment and investment capital.
Spread of risk - CORRECT ANSWER- (i) Spread of Risk3; Insurance provides a mechanism
in which the losses of the few are shared among the many. Insurance can be viewed as a large
pot into which all insureds place their premiums. In addition to paying the cost of running the
business, this pot has to provide for payment of the losses of those who have claims. The
ability to contribute to a fund to share the losses of the few among the many is the major
function of insurance.
Basis of credit system - CORRECT ANSWER- (ii) Basis of Credit System; CONSUMER
ACCESS TO INSURANCE FREES UP CREDIT Bert and Betty Butler live in Yourtown.
Like most Canadians, they have had to use loans to finance the purchase of their automobiles,
home, and business. The availability of insurance to protect the investments of lenders helps
to facilitate the granting of credit.
Eliminates worry - CORRECT ANSWER- (iii) Eliminates Worry - Encourages
Entrepreneurship; The availability of insurance allows people to engage in many ventures
,without having to set money aside to meet the financial requirements that may arise from
future losses. By making a small, defined expenditure (the insurance premium) to cover large
but uncertain future losses, much of the anxiety and worry about the unknown future is
reduced.
Loss prevention and loss reduction - CORRECT ANSWER- (iv) Loss Prevention and Loss
Reduction; In addition to paying for losses, the insurance industry works hard to prevent
losses and to reduce their severity. Active partnerships have been formed with communities
and public officials to deal with important issues such as road safety, fire prevention, and
anti-theft measures. Other joint projects have included a nation-wide campaign to fight
insurance fraud.
Source of employement and investment capital - CORRECT ANSWER- (v) Source of
Employment and Investment Capital. INSURERS ARE MAJOR EMPLOYERS AND
INVESTORS Canadian insurers employ or contract services from more than 100,000 people,
including thousands of people working in a wide independent brokers, adjusters, and
actuaries. In addition, range of trades and professions such as car repair, construction,
medicine, law, and accounting derive income from the settlement of insurance claims.
Insurance is big business. Claims total into the billions of dollars $114 billion in 2015 and, if
history is any indication, this amount annually. Assets controlled by insurers amounted to
more than will double in ten years.
Definition of insurance - CORRECT ANSWER- A meaning of insurance is provided in the
Insurance Act of each province. Insurance means "the undertaking by one person to
indemnify another person against loss or liability for loss in respect of a certain risk or peril
to which the object of insurance may be exposed ... or to pay a sum of money or other thing
of value upon the happening of a certain event." [Insurance Act]
Five important points of insurance - CORRECT ANSWER- (I) Insurance provides A means
of shifting one's financial responsibility for a loss to another party
(II) Payment will be made only in the event of that happening of a certain risk or Peril
(III) The amount of the payment is restricted to the amount required to indemnify the insured
(IV) Insurance covers losses to watch the object of the insurance may be exposed
(V) The indemnity provided can be in the form of a sum of money or other thing of value
,(i) Insurance provides a means of shifting one's financial responsibility for a loss to another
party; - CORRECT ANSWER- Bert and Betty Butler own Butlers' Best Buy Furniture Ltd., a
home, cottage, boat, and five vehicles. Their savings would not replace any of these items in
the event of an accidental loss, nor cover the costs of a significant legal judgement against
them. Insurance provides them with a means shifting these financial obligations to others. In
exchange for money (referred to as a "premium"), an insurance company will enter into a
contract to assume the financial responsibility for the Butlers' losses. When this relationship
exists, the Butlers are referred to as "insureds."
(ii) Payment will be made only in the event of the happening of a certain risk or peril; -
CORRECT ANSWER- The insurance meaning given to the risk is the chance of financial
loss to watch the object of insurance may be exposed insurance can be purchased to cover a
variety of exposures or chances of financial loss
As a result of common usage search risk has also come to mean the object of insurance such
as a building. This Latter definition is not intended in the definition provided for insurance in
the provincial insurance act
A peril is simply defined as the cause of loss such as fire wind or hail. The Peril or causes of
loss insured can be limited or extensive in scope
(iii) The amount of the payment is restricted to the amount required to indemnify the insured;
- CORRECT ANSWER- The purpose of insurance is to indemnify or compensate the victim
of a loss. The proper application of the principle of indemnity ensures that people receive the
actual amount of their loss, no more and no less. To pay more than the loss would enable
people to profit. To pay them less would result in an incomplete indemnity. When arriving at
the amounts of indemnity to be paid, the insurer will attempt to determine the value of the
insured property as it existed immediately prior to the loss.
AMOUNT OF INDEMNITY IS DETERMINED BY VALUE OF PROPERTY
IMMEDIATELY PRIOR TO LOSS The Butlers purchased their home for $75,000 ten years
ago. Today, it is worth $140,000. If their home was to be destroyed by an insured peril today,
the actual amount of their loss would be $140,000. As with all property losses, it is the value
of the property as it existed immediately prior to its loss that forms the basis of a complete
indemnity.
(iv) Insurance covers losses to which the object of insurance may be exposed; - CORRECT
ANSWER- The purpose of insurance is to pay for those losses which are both accidental and
, future. It is not intended to respond to losses which are deliberate or which have already
occurred.
DELIBERATE LOSSES AND LOSSES WHICH HAVE ALREADY OCCURRED ARE
NOT INSURED As deliberate losses represent a waste of human and other resources, society
does not support paying for them. Also, sometimes people will attempt to purchase insurance
after a loss has already occurred. If insurance companies paid for those losses, people would
never purchase insurance until it was needed. Insurance companies could not operate
profitably nor even survive in such an environment.
(v) The indemnity provided can be in the form of a sum of money or other thing of value. -
CORRECT ANSWER- The insurance company always has the right to settle a claim either
by repairing or replacing the damaged item(s) or by paying the insured money for the
damaged item(s).
INSURER MAY OPT TO REPAIR v. CASH SETTLEMENT The Butlers' insurance contract
is with the Fortress Insurance Company. Last August, the roof of their dwelling was severely
damaged during a windstorm. Generally, when payment is required for both labour and
materials, the insurer would agree to pay to repair or replace the damage rather than make
settlement in the form of money. A cash payment would normally be made when paying for
losses to items such as compact discs, musical instruments, household or other personal
property items.
Property and casualty insurance in canada - CORRECT ANSWER- Property and casualty
(P&C) or general insurance involves all types insurance other than life and health insurance.
It includes:
-Automobile insurance: Automobile insurance premiums represent more than fifty percent
(50%) of all property and casualty premiums in Canada. In fact, automobile premiums far
exceed the premiums of all other classes combined.
-Property insurance Habitational and business properties represent the second largest source
of premiums to insurers. •
-Liability insurance: Liability insurance provides protection when insureds are financially
responsible for injury or damage they cause to others. Premiums from liability insurance
represent the third major source of income to insurers.
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