C11 Principles and Practice – Study 2

Insurance has developed through many centuries to meet the changing needs of society. Some of the earliest types of insurance were; robbery insurance, life insurance, cargo insurance, marine insurance and fire insurance.

Initially Canada only had large British insurance companies, with a few exceptions. Some of the earliest insurance companies in Canada were Halifax Fire Assurance Company, Quebec Fire Insurance, British America Assurance company and The Gore District Mutual.

Insurance has been divided into three major categories

• Social insurance – provided by the government e.g. OHIP, unemployment benefits and workers compensation.
• Life and health insurance – provided by the major life insurers and offer life, accident, sickness and disability insurance plus other financial services.
• General Insurance/ Property and Casualty Insurance – which covers all other aspects of insurance some of the major general insurance classes include:

1. Automobile – the largest single class of general insurance sold in Canada. It

provides coverage for; liability to third parties, accident benefits for the insured and physical damage coverage for vehicles.

2. Property – insured against loss or damage to property. Initially designed to cover

the peril of fire only, it has evolved into a much broader range of coverage.  

3. Business Interruption – provides coverage against loss of income while

damaged buildings or business operations are being restored.

4. Boiler and Machinery – a specialized type of property insurance.
5. Crime – includes burglary, robbery, theft and fidelity insurance.
6. Liability – claims arising out of an insured’s legal liability to a third party.
7. Marine – includes hull, cargo and liability insurance.
8. Aviation - includes hull and liability insurance.
9. Floater Policies – insures portable items.
10. Personal Property – such as furs, jewellery, camera equipment and musical instruments.  
11. Commercial property – covers portable items of a commercial nature.
12. Inland Transportation – insures against loss of or damage goods while in transit.

Surety Bonds are not insurance at all, but have been traditionally offered by insurance companies.

The primary function of insurance is to spread risk: Share the losses of the few among the many.  

Functions of Insurance

1. Spread of risk by the individual – purchasing insurance.

Spread of risk by the insurer – volume, diversity of type and diversity of location.

2. Security - provides peace of mind to the insured.
3. Credit - protects both the insured’s and lenders financial interests.
4. Capital – the economy is stimulated by the insurer’s investment of the premium collected from the insured’s.
5. Employment – provides direct employment for people and support many insurance related businesses.
6. Loss Prevention – by lobbying for safer products and practices, fire prevention, safe driving, and crime and fraud prevention.

Sample Exam Questions - Principles and Practice

Study 2  -  History and Function of Insurance

Multiple Choice Questions

December 2001

1. Which of the following classes of business transacted by insurance companies in Canada is NOT actually insurance?

1. Business interruption
2. Life
3. Sickness
4. Surety

2. The main function of insurance is to

1. keep insureds from financial ruin
2. pay losses
3. prevent losses
4. spread risk

3. Which of the following is NOT a  loss prevention activity in which the insurance industry is involved?

1. Burglar alarm monitoring
2. Crime and fraud prevention
3. Fire loss prevention
4. Road safety and safe driving

July 2001

4. The main purpose of insurance is to

1. provide compensation
2. provide security
3. share the losses of the few among the many
4. show that the law of averages always works

5.  The largest single class of general insurance sold in Canada is

1. automobile insurance
2. commercial property insurance
3. fire insurance
4. personal property insurance

April 2001

6. Which of the following does not fall into the category of general insurance?

1. Business interruption
2. Crime insurance
3. Health insurance
4. Hail insurance

7. Insurers try to achieve a balance of premiums to losses by

1. having a good spread of risk
2. insuring a small number of superior risks
3. specializing in one or two kinds of risk
4. writing as much business in one location as possible

8. An insured spreads his risk by

1. diversity of location of risk
2. diversity of type of risk
3. buying insurance
4. volume

9. Inland Marine insurance

1. applies to real property only
2. is not offered under most Property and Casualty policies
3. deals with movable items only
4. includes an element of “transportation” or “communication” exposure

10. The main function of insurance is

1. an increase in security
2. not putting all property in one location
3. the spread of risk
4. the reduction of the possibility of loss

July 2000

11. The largest single class of general insurance sold in Canada is

1.   automobile insurance
2.   commercial property insurance
3.   fire insurance
4.   personal property insurance

April 2000

12. The main function of insurance is

1. making profit for the shareholders
2. spreading the risk
3. capital investment
4. creation of employment

13. Which of the following is NOT a loss prevention activity in which the insurance industry is involved

1. Fire prevention
2. Burglar alarm monitoring
3. Road safety and safe driving
4. Crime and Fraud prevention

14. Which of the following classes of business transacted by insurance companies in Canada is NOT

actual insurance?

1. Life
2. Accident and sickness
3. Surety
4. Business interruption

 

15. The need for Liability insurance arises because of the

1. possibility of injuries
2. hazards of the premises
3. perils of the operation of a business
4. possibility of legal obligation to others

Essay Questions

December 2001

1.       (a)     Identify TWO (2) areas of loss prevention activities in which the insurance industry is engaged.

In each case, give THREE examples of initiatives used by the industry to promote loss   

Prevention or loss reduction.           (14 marks)

1. Contrast physical hazard with moral hazard, and use examples.

July 2001 and December 2000

1. The availability of insurance in modern society is essential to the well being and security of the  

Population. Discuss FIVE (5) functions of insurance other than spread of risk.     (20 marks)

April 2001

3. Identify and discuss FIVE (5) ways in which insurance benefits society. In each case, indicate what     

would happen if insurance did not exist.

December 2000

3. (a)        Name and briefly describe the THREE main categories of insurance. Give TWO   

two examples of each category.   (12 marks) Study 2

1. Distinguish between peril and hazard. Give TWO examples of each.

(8 marks) Study  1

July 2000

4. (a)       Describe the benefits of insurance to individual persons.

1. Describe the benefits and stimulation that the insurance industry provides for business and

the economy in general.

5. (a)        Name and briefly describe the THREE (3) main categories of insurance. Give TWO

            examples of each category. (15 marks)

1. Briefly explain the coverages that may be contained in “inland transportation”

Insurance. (5 marks)