📊 Underwriting, Risk Assessment and Insurance Principles

1. Which type of risk is insurable?

1. Pure risk, where the outcome is loss or no loss
2. Speculative risk, where a gain is possible as well as a loss
3. Political risk in every form
4. Market risk on an investment

Source: RIBO Blueprint, underwriting and risk assessment. Insurance transfers the chance of loss, not the chance of profit, which is why business ventures and investments fall outside its scope.

2. A peril is best defined as:

1. The person exposed to loss
2. A condition that increases the chance of loss
3. The financial consequence of a loss
4. The cause of a loss, such as fire, theft or windstorm

Source: RIBO Blueprint, underwriting and risk assessment. Distinguishing the peril from the hazard is what allows a named perils form to be read correctly and a claim to be placed under the right coverage.

3. A hazard is:

1. The cause of the loss itself
2. A condition that increases the likelihood or severity of a loss
3. The amount of insurance carried
4. The insurer's expected profit

Source: RIBO Blueprint, underwriting and risk assessment. Underwriting is largely the identification and pricing of hazards, and a broker who describes them accurately in a submission gets better terms.

4. An unfenced swimming pool is an example of which type of hazard?

1. Morale hazard, being indifference to loss
2. Moral hazard
3. Physical hazard
4. Legal hazard

Source: RIBO Blueprint, underwriting and risk assessment. Physical hazard is a tangible feature of the property or operation, and it is the type most readily corrected by loss prevention.

5. An insured who deliberately sets a fire to collect insurance money illustrates:

1. Legal hazard
2. Physical hazard
3. Morale hazard
4. Moral hazard

Source: RIBO Blueprint, underwriting and risk assessment. Moral hazard concerns dishonesty, and it is the reason underwriters look closely at financial condition and prior claims history.

6. An insured who leaves a car unlocked because it is insured illustrates:

1. Moral hazard, which concerns deliberate dishonesty
2. Morale hazard
3. Physical hazard
4. Legal hazard

Source: RIBO Blueprint, underwriting and risk assessment. Carelessness born of the existence of insurance is different from dishonesty, and deductibles exist partly to counteract it.

7. A jurisdiction where courts award unusually large damages creates which kind of hazard?

1. Legal hazard
2. Physical hazard
3. Moral hazard
4. Morale hazard

Source: RIBO Blueprint, underwriting and risk assessment. Legal hazard explains why liability limits and premiums differ by territory, and it is a reason to review coverage for clients operating outside Canada.

8. The law of large numbers means that:

1. Large limits of insurance are cheaper for each dollar of cover bought
2. Large losses turn out to be a good deal more common than the small ones in any insured portfolio
3. Insurers must be large in order to survive in a competitive market
4. The larger the number of similar exposure units, the more accurately losses can be predicted

Source: RIBO Blueprint, underwriting and risk assessment. Predictability is what allows a rate to be set at all, and it is the reason an insurer needs a spread of similar risks rather than a handful of unusual ones.

9. Which characteristic makes a risk difficult to insure?

1. Losses that are accidental in their nature rather than deliberately brought about
2. A single event capable of causing catastrophic losses to the whole pool at once
3. Losses that are measurable in money at the time they are suffered
4. A large number of similar exposures spread across a wide territory

Source: RIBO Blueprint, underwriting and risk assessment. Catastrophe concentration is why earthquake and flood carry sub-limits and percentage deductibles rather than sitting inside the base form.

10. An exposure unit is:

1. The item or interest exposed to loss, used as the basis for rating
2. The insurer's profit margin on each of the classes it agrees to write
3. The claims department's workload during a given period
4. The deductible the insured bears on each and every loss

Source: RIBO Blueprint, underwriting and risk assessment. Sales, payroll, square footage and vehicle counts are all exposure bases, chosen because they correlate with the chance and size of loss.

11. Adverse selection describes the tendency for:

1. Those most likely to suffer a loss to be the most eager to buy insurance
2. Insurers to select only good risks
3. Brokers to place business with one insurer
4. Clients to under-insure their property

Source: RIBO Blueprint, underwriting and risk assessment. Underwriting rules, deductibles, waiting periods and eligibility criteria all exist to counteract it, and without them a pool prices itself out of existence.

12. Which of these is a speculative rather than a pure risk?

1. Theft of inventory
2. A fire at the factory that destroys the plant
3. Investing in a new product line
4. Liability for a customer's injury

Source: RIBO Blueprint, underwriting and risk assessment. The possibility of gain takes the exposure outside insurance and into business decision-making, which is why business risk is retained rather than transferred.

13. Insurable interest means that the insured:

1. Would suffer a financial loss if the insured event occurred
2. Owns the policy that has been issued on the property concerned
3. Has paid the premium due for the current period of cover in advance
4. Has been insured before with the same company or another

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Without it, the contract is a wager, and in property insurance the interest must exist at the time of loss for the claim to be paid.

14. When must insurable interest exist in a property insurance claim?

1. At no particular time named in the contract
2. Only when the policy is issued
3. Only at renewal
4. At the time of the loss

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. A client who has sold the insured property before the fire has nothing to be indemnified for, which is why changes of ownership must be reported.

15. The principle of indemnity means that the insured is:

1. Restored to approximately the same financial position as before the loss, without profit
2. Paid the full amount of the insurance in every single case, whatever the loss actually suffered
3. Paid the market value of the property at the date the loss occurred
4. Paid for the emotional distress the loss has caused the household

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Replacement cost and agreed value wordings are deliberate exceptions, and understanding them lets a broker explain a settlement without surprises.

16. Subrogation allows an insurer to:

1. Recover the deductible from the insured
2. Recover from a third party responsible for a loss it has paid
3. Cancel the policy after paying a claim
4. Refuse to pay a claim

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. The right passes to the insurer once it has indemnified the insured, and the insured must not prejudice it by signing a pre-loss waiver without telling the insurer.

17. Contribution applies where:

1. The deductible is shared between the parties to the claim
2. Two insureds share a single policy that was issued on the same property
3. Two insurers share a client between them at the same time
4. More than one policy covers the same interest against the same peril

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. The principle prevents recovery twice for a single loss, and other insurance clauses set out how the sharing is worked out.

18. Proximate cause is:

1. The last of the events that occurred immediately before the damage itself was actually suffered
2. The dominant, effective cause that sets in motion the chain of events leading to the loss
3. The first event in the sequence that ended in the loss being suffered
4. The most expensive part of the loss the insured has actually suffered

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Where a covered and an excluded peril both appear, this analysis decides whether the claim is payable, which makes it more than a theoretical concept.

19. Utmost good faith requires:

1. Only the insurer to disclose
2. Only the insured to disclose
3. Both parties to disclose material facts honestly
4. Neither party to disclose anything

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Canadian law has developed the insurer's side through the jurisprudence on unfair claims handling, so the duty genuinely runs in both directions.

20. A material fact is one that:

1. Appears on the declarations page issued with the policy document
2. The insured happens to consider important at the time of completing and signing the application form
3. Would influence a prudent underwriter in deciding whether to accept the risk or on what terms
4. Is mentioned in the policy conditions the Act prescribes for the class

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. The test is objective, which is why a client's honest belief that something was unimportant does not save the contract from being voidable.

21. An applicant answers every question truthfully but volunteers nothing further. Has the duty of disclosure been met?

1. Yes, answering the questions is always sufficient
2. Not necessarily, since the duty extends to material facts a prudent underwriter would want to know
3. No, the applicant must disclose everything about their life
4. Yes, provided the application is signed

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Application forms cannot anticipate everything, and a broker who asks open questions protects the client from an argument about non-disclosure.

22. A representation differs from a warranty because:

1. A warranty applies only to property insurance and never to a liability contract
2. A representation is always made in writing, whereas a warranty is given orally at the moment the application is completed
3. A representation is a statement believed to be true, while a warranty is a promise that must be strictly complied with
4. A representation is made by the insurer rather than by the applicant

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Protective safeguard conditions operate like warranties, and a client who lets an alarm lapse discovers the difference at the worst possible time.

23. Concealment in insurance means:

1. Losing the policy document
2. Making an honest mistake on an application
3. Failing to read the policy
4. Deliberately withholding a material fact from the insurer

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Deliberate silence is treated as seriously as an untrue statement, and both breach the good faith foundation the contract rests on.

24. Which of the following is an essential element of any valid contract?

1. Offer and acceptance supported by consideration
2. A witness to the signature of each of the parties
3. Registration with the province where it is made
4. A notarised signature on the written document of agreement

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Insurance contracts require the ordinary elements together with legal capacity, a lawful purpose and insurable interest.

25. An insurance contract is described as conditional because:

1. It can be cancelled by either of the parties on notice given in the manner the Act prescribes
2. The insurer's obligation depends on the insured complying with the policy conditions
3. It has a fixed term, outside which neither party owes the other anything
4. It is written by the insurer, so that ambiguity is read against its author in any dispute

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Notice, proof of loss, cooperation and material change are all conditions, and failure on any of them can defeat an otherwise covered claim.

26. Because an insurance policy is a contract of adhesion:

1. The policy cannot be enforced
2. The insured may rewrite the terms
3. Genuine ambiguity is construed against the party that drafted it
4. The premium is negotiable

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. The contra proferentem rule is why insurers draft carefully and why a broker's clear explanation of an ambiguous term is valuable to the client.

27. Which document forms the basis of the contract between insurer and insured?

1. The certificate of insurance issued to a party that requires proof of the cover
2. The application, together with the policy, declarations and endorsements
3. The premium receipt, which records the consideration for the contract of insurance
4. The broker's quotation, which sets out the terms the insurer offered

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. An inaccurate application infects the whole contract, which is why the accuracy of that document is the single most important piece of placement work.

28. A binder issued by a broker:

1. Replaces the application, which the insurer no longer needs once cover is bound
2. Is a permanent contract that stands until one of the parties gives notice to end it
3. Has no legal effect, since only the insurer can create a contract of insurance
4. Provides temporary evidence of coverage until the policy is issued or declined

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Binding must occur within the authority the insurer has granted, and a binder issued outside that authority creates a serious exposure for the brokerage.

29. What is ratification in the law of agency?

1. A written agency agreement
2. An agent's acceptance of instructions
3. A principal's later approval of an act performed by an agent without authority
4. The insurer's cancellation of a binder

Source: the general principles of insurance and contract law applied under the Insurance Act, R.S.O. 1990, c. I.8. Ratification can rescue an unauthorised binder, but relying on it is not a business plan, and the broker remains exposed if the insurer refuses.

30. Express authority is:

1. Authority the public assumes exists
2. Authority specifically granted to the agent by the principal
3. Authority implied from custom
4. Authority granted by a regulator

Source: the law of agency as applied to brokers, with R.R.O. 1990, Reg. 991 on premium held in trust. An agency agreement is the usual source, and reading it is how a broker knows the classes and limits it may bind.

31. Implied authority is:

1. Authority reasonably necessary to carry out the express authority granted
2. Authority that an agent has invented for itself when dealing with a third party
3. Authority given by a third party rather than by the principal itself to the agent
4. Authority granted by statute to any person acting as an agent

Source: the law of agency as applied to brokers, with R.R.O. 1990, Reg. 991 on premium held in trust. Nobody lists every act a broker must perform to place a policy, so the law fills the gap with what the express grant necessarily requires.

32. Apparent authority can bind an insurer where:

1. The agent states that they have the authority and the third party simply takes them at their word
2. A reasonable third party would believe from the principal's conduct that the agent had authority
3. The agent has acted before without authority and was not corrected at the time
4. The client insists on it and refuses to deal with the principal directly

Source: the law of agency as applied to brokers, with R.R.O. 1990, Reg. 991 on premium held in trust. It is the principal's conduct that creates the appearance, which is why insurers control letterhead, systems access and the wording of agency appointments.

33. An agent owes its principal duties of:

1. Loyalty, obedience to lawful instructions, care and accounting for money received
2. Confidentiality only, since every other duty is owed to the client rather than the principal
3. Profitability, measured by the volume of business the agent places each year with the principal
4. Exclusivity in every case, so that an agent may represent only one principal

The obligation to account for money received is the origin of the trust accounting rules in R.R.O. 1990, Reg. 991 that govern every Ontario brokerage.

34. A broker binds a risk outside the authority in its agency agreement and the insurer refuses to honour it. What is the likely outcome?

1. The insurer must always honour the binder, whatever the agency agreement says
2. The client is left with no coverage and no remedy of any kind, since the binder was issued without the power to do so
3. The client may still be protected by apparent authority, with the insurer's recourse running against the broker
4. The binder is void for all purposes, including as between broker and client

Source: the law of agency as applied to brokers, with R.R.O. 1990, Reg. 991 on premium held in trust. The client's protection and the broker's liability are separate questions, and this is one of the fastest ways a brokerage generates an errors and omissions claim.

35. For which purpose does a broker act as the insurer's agent rather than the client's?

1. Recommending an insurer
2. Receiving premium on the insurer's behalf
3. Assessing the client's needs
4. Advocating on a claim

Source: the law of agency as applied to brokers, with R.R.O. 1990, Reg. 991 on premium held in trust. That limited agency is why payment to the broker is generally effective against the insurer, and why the money must go into a trust account.