IIC C11 Principles and Practice of Insurance Exam Practice Test

Insurable interest exists when someone would suffer a financial loss if a person or property were damaged, lost, or deceased. Employers have a legitimate, recognized insurable interest in the lives of key employees, as their death or disability could result in financial loss—for example, reduced productivity, training costs, or loss of specialized expertise. Therefore, A represents a valid and legally recognized insurable interest.

Option B involves investment income earned by insurers—this is not an insurable interest but a financial outcome of operations. Option C reflects a business motive but not an insurable interest because an underwriter does not stand to personally lose financially if a policyholder dies or property is damaged. Option D is generally invalid unless the employee can demonstrate a direct financial dependency, which is typically not the case.

Thus, the only clear example of insurable interest is A: the employer’s interest in the life of an employee.

Brokers hold client premiums in trust accounts, separate from operating funds. This is a legal requirement under provincial insurance legislation. Trust funds belong to insurers (or insureds) until properly remitted. If TOY Insurance Brokers used trust funds to pay their own expenses, they violated both fiduciary duty and regulatory obligations. This constitutes serious professional misconduct and is one of the most common and serious reasons for immediate termination of a broker contract—often accompanied by regulatory investigation or license suspension.

Option A would not justify termination because service standards should be defined by the insurer, not the broker. Option B reflects good insurer practice and is unrelated to termination. Option C is incorrect because brokers do not remit commissions to insurers—insurers pay commissions to brokers.

Therefore, the only correct answer is D: failure to maintain premiums in a trust account.

Statutes—especially older, comprehensive ones—can only be amended or repealed by an act of the legislative authority that created them. In Canada, this means a provincial or federal legislature must formally pass a new act or amendment. Legislatures are the bodies responsible for enacting, revising, or modernizing statutory law to reflect new legal, social, or commercial developments.

Option B is incorrect because Canada does not change statutes through public votes (referenda), except in rare constitutional matters. Option C is incorrect and uses U.S. terminology (“congress”), which does not apply to the Canadian system. Even if compared to Parliament, a bill alone does not change a statute until it is passed into law by the legislature. Option D is incorrect because the Supreme Court interprets law, but does not rewrite statutes.

Thus, only an act of legislature can formally alter statutory law, making A the correct answer.

Insurance contracts are built on the principle of utmost good faith, meaning applicants must disclose all material facts that could influence the insurer’s decision to accept the risk or determine the premium. Failing to mention a material fact—such as the home being unoccupied for long periods—is considered non-disclosure. Unoccupancy increases the risk of vandalism, frozen pipes, fire severity, and delayed emergency response, all of which affect underwriting decisions.

Option A, negligence, refers to failure to act with reasonable care, not failure to disclose.

Option C, breach of warranty, applies only after a policy is in force and a condition guaranteed to be true is violated.

Option D, discharge of contract, refers to cancellation or completion of contractual obligations.

Since the issue arises during the application stage and involves withholding a material fact, the correct classification is non-disclosure.

The Facility Association is the Canadian automobile insurance mechanism designed to ensure that high-risk drivers, who cannot obtain insurance in the voluntary market, are still able to secure the legally required automobile insurance coverage. All auto insurers in participating provinces must be members, and losses and premiums in the pool are shared among them according to market share.

Option B, “Substandard Group,” is not an official Canadian mechanism. Option C does not refer to any recognized underwriting pool for high-risk auto insurance. Option D is not an actual insurance entity.

Only the Facility Association accurately represents the mandatory pooling arrangement for high-risk drivers.

Liability insurance arises because individuals and businesses have legal obligations not to cause bodily injury or property damage to others. When someone is negligent, the law allows the injured party to seek compensation. These legal obligations can be substantial and financially devastating. Liability insurance provides protection by transferring the financial burden of compensating others to an insurer. It ensures that the insured can meet their legal responsibilities and that injured third parties receive compensation.

Option A is incorrect because liability insurance is not for protecting oneself from personal risk—it protects against obligations to others. Option C refers to social norms, which may influence behavior but do not impose enforceable financial duties. Option D refers to ethics, but ethical feelings alone do not create legal liability.

The key reason liability insurance exists is the legal requirement to compensate others when negligent, making B the correct answer.

When two insurers cover the same property, theprinciple of contributionapplies. Each insurer pays a proportion of the loss based on its share of the total insurance in force. Here:

Total insurance = $300,000 + $100,000 = $400,000

Insurer A’s share = 300,000 / 400,000 =75%

Insurer B’s share = 100,000 / 400,000 =25%

Loss = $80,000

Insurer A pays 75% × 80,000 =$60,000

Insurer B pays 25% × 80,000 =$20,000

Thus,Cis correct.

Spacecraft liability is anextremely specialized, high-severity, low-frequency riskrequiring underwriting expertise not found in standard insurers. TheLloyd’s marketis internationally known for insuring unique, complex, and unusual risks—from satellites and spacecraft to aviation and marine exposures. Lloyd’s operates as a marketplace of syndicates, allowing multiple underwriters to participate in a single risk, making it ideal for large and unusual exposures.

A health/life insurer (B) is irrelevant; they do not underwrite commercial liability exposures.

A captive insurer (C) could theoretically insure such a risk but requires the client tocreate and fundtheir own insurance company—impractical unless they are very large and sophisticated.

Government insurers (D) generally insure auto, workers' comp, or agricultural risks—not spacecraft.

Thus the best recommendation isA: Lloyd’s Insurance Market.

In the structure of reinsurance practices explained inPrinciples and Practice of Insurance, aretrocessionaireis the reinsurer that accepts risk from another reinsurer. This occurs through a process calledretrocession, where a reinsurer (the retrocedent) transfers a portion of its assumed risk to another reinsurer to further spread exposure and maintain solvency stability.

The terminology is important:

Theprimary insurerissues the original policy to the insured.

Thereinsurer(cessionaire) accepts risk from the primary insurer.

When that reinsurer then cedes part of the risk again, the receiving party is theretrocessionaire.

Retrocession is essential in risk-management frameworks because it allows reinsurers to diversify exposures and avoid concentration risks from catastrophic events. Therefore, the correct term for the second reinsurer isC. Retrocessionaire.

To be insurable, a peril must befortuitous, measurable, and not within the direct control of the insured.Cybersecurity risksmeet these criteria, which is why insurers offercyber liability and data breach insurance. These policies cover hacking, ransomware, privacy breaches, and business interruption caused by cyber events.

Mismanagement (B) is uninsurable because it results from internal decision failure.

Under-capitalization (C) is a business failure, not a fortuitous peril.

Product obsolescence (D) is a predictable business cycle risk and cannot be insured.

Thus, the only insurable peril listed isA: Cybersecurity.

Brokers are legally and ethically required to keep premiums in a trust account, separate from operating funds. These trust monies belong to insurers (or insureds, depending on the context) until remitted. Misusing trust funds—such as using them to pay operating expenses—is considered a serious breach of fiduciary duty and a violation of insurance regulatory requirements. Such conduct jeopardizes financial integrity and can lead to immediate termination of the broker contract, regulatory sanctions, or license revocation. Therefore, option D reflects a valid and serious reason for terminating the agreement.

Option A concerns underwriting rules, not broker misconduct. Option B actually reflects good insurer service, not grounds for termination. Option C is incorrect because brokers do not owe commissionstoinsurers—insurers pay commissionstobrokers. The broker’s responsibility is to remit collected premiums, not commissions.

Thus, the only option representing a breach serious enough to terminate an agency contract is D.

AGuaranteed Replacement Cost (GRC)clause is a special provision in homeowners’ insurance that ensures the insurer will pay thefull cost to rebuild or repairthe dwellingeven if the loss exceeds the stated policy limit, provided all policy conditions are met (such as insuring to value and notifying the insurer of changes to the building).

This clause protects homeowners from unexpected increases in construction costs due to inflation, labour shortages, or material price spikes. The insurer guarantees complete reconstruction of the home, not merely up to policy limits.

Option A is not a recognized policy clause.

Option B (total replacement cost clause) is not the standard industry term.

Option C (pure restitution clause) does not exist in homeowners insurance terminology.

The only accurate clause that obligates the insurer to pay above policy limits is theGuaranteed Replacement Cost clause.

Under theCivil Code of Québec, a valid contract requires four essential elements:

Capacity– Parties must be legally capable of contracting.

Cause– The reason or purpose each party has for contracting.

Consent– Agreement must be free and informed, without error, fear, or fraud.

Object of the contract– The subject matter of the agreement must be sufficiently defined and lawful.

These elements mirror common-law principles but differ in terminology. Option D is close but inaccurate—“acceptance” is part of consent, and “subject” is a less precise term than “object.” Options A and B include incorrect or irrelevant components.

Thus, the correct answer reflecting Quebec civil law requirements isC.

Whenever coverage is boundorally, the broker must follow up withwritten confirmationto both:

theinsured, to confirm the accuracy of information provided, and

theinsurer, to notify them of all disclosed underwriting details.

This written documentation protects all parties by ensuring the insurer is fully aware of material facts—such as the presence of a swimming pool—and prevents disputes like this one.

Option A is unnecessary and not industry practice.

Option C refers to a notice after issuance, but the dispute occurred at binding, so this is too late.

Option D is incorrect; the insurer does not verify every detail directly with insureds—this is the broker’s responsibility.

Thus, the broker should have completed written confirmation, makingBthe correct answer.

Brokers act as agents of the insured, meaning they owe a professional duty to advise the insurer of any material change in risk. A material change is any alteration that significantly affects the underwriting assessment of the policy. If a broker fails to report such a change, the insurer is legally entitled to void coverage or deny a claim because it was not given full information to properly rate or accept the risk.

When a claim is denied due to the broker’s failure—not the insured’s intentional nondisclosure—the insured will typically seek compensation by suing the brokerage for negligence. The brokerage has a legal duty of care to ensure proper communication with insurers on behalf of the client.

Options A and B make no sense because the insurer will not voluntarily pay after a justified denial. Option C is unlikely, because the insurer can demonstrate that it never received notification of the change. The correct and realistic recourse is legal action against the brokerage, making D correct.

In contract law,considerationrefers to the exchange of something of value between parties. It is a necessary element for forming a legally binding insurance contract. In insurance, the insurer promises to indemnify the insured in exchange for thepremium—this exchange constitutes consideration.

OptionAis the only scenario demonstrating a clearbargained-for exchange. Jennifer gives up a painting of value, and Shania provides monetary payment. Even though the price is reduced, consideration still exists because each party is giving something of legal value.

Option B shows no exchange—only contemplation of future pricing.

Option C shows no contract formed, because the offer was not accepted.

Option D is a return/refund scenario, not an exchange forming a new contract.

Thus,Ais the best example of consideration.

This question is identical to Question 25, so the correct answer and reasoning are the same. Whether an adjuster is a staff employee or an independent contractor, they are hiredto represent the insurerin the claims process. They are both compensated by the insurer—staff adjusters through salary and benefits, independent adjusters through fees or billing arrangements. Both must meet licensing requirements established by provincial regulatory bodies, conduct investigations, and report their findings to the insurer. They are also both subject to authority limits on claim settlement.

Thus, the only option that correctly reflects their similarity isB: both serve and are paid by insurers.

Hazards are conditions thatincrease the likelihood or severity of a losscaused by an insured peril. Underwriters assess hazards (physical, moral, and morale hazards) to determine whether a risk is acceptable and at what price.

If hazards make an insured perilmore likely to occur, the underwriter willincrease the rateto reflect higher expected losses. This aligns exactly with option C.

Option A is close but incorrectly states “insured event,” not “insured peril,” and is less precise.

Option B misinterprets the law of large numbers; it applies to loss predictability, not hazard listing.

Option D misunderstands rating—rates are not calculated by multiplying premium by insured value.

Thus, the correct statement isC.

Insurers in Canada are heavily regulated in the way they invest their capital because they must remain financially strong to pay future claims. Government regulations—federal for federally regulated insurers and provincial for provincially regulated insurers—set out specific investment restrictions, including prohibiting certain high-risk or illiquid investments. These rules protect policyholders by ensuring insurers maintain solvency and liquidity.

Insurers must invest prudently in order to meet long-term obligations, and therefore regulators specify the classes of investments deemed too risky or unsuitable. This includes limits on speculative investments or holdings that could jeopardize stability.

Option A is incorrect because insurers arenotrequired to invest in non-liquid assets; in fact, liquidity is important.

Option B is incorrect; although some foreign investments may be allowed, the statement is not a broad principle of regulation.

Option C is incorrect because insurers face significant restrictions, not complete freedom.

Thus, D is the correct answer.

Risk mitigation refers to reducing the frequency or severity of potential losses. A first-time homeowner can mitigate risk by taking proactive measures such as installing smoke alarms, securing doors and windows, maintaining the property, or eliminating hazards. These actions directly decrease the homeowner’s volume of risk by reducing the probability of a loss or limiting its potential impact.

Option A—purchasing insurance—is not risk mitigation; it is risk transfer, where the financial consequences of loss are shifted to an insurer. Insurance does not reduce the likelihood of loss; it only provides compensation after loss.

Option B is the opposite of mitigation.

Option D is irrelevant to risk management.

Thus, the correct answer is C: Decrease their volume of risk.

Comprehensive Explanation (150–250 words):

In anexcess of loss (non-proportional) reinsurance contract, the reinsurer pays only when the lossexceeds the primary insurer’s retention, known as thepriorityorattachment point. In this question, the priority is$80,000. This means reinsurance doesnotrespond unless the loss exceeds $80,000.

Here, the actual loss is$60,000, which isbelowthe attachment point. Because the loss never reaches the $80,000 threshold, the reinsurer owesnothing. Theentire lossremains the responsibility of the primary insurer.

The reinsurer’s limit of $100,000 only becomes relevant if the loss exceeds $80,000, which is not the case here.

Therefore, the primary insurer pays100% of the $60,000 loss.

Correct answer:D.

Comprehensive Explanation (150–250 words):

The termindemnifyis fundamental in insurance. To indemnify means tocompensate an insured party for actual losses or expenses incurred, restoring them as closely as possible to the financial position they occupied immediately before the loss. This principle ensures that insurance does not create profit or gain for the insured but instead acts as a financial safety mechanism to cover legitimate losses.

Indemnity is applied across many types of policies—property, automobile, liability, and more—and forms the basis of how claims are settled. When an insurer indemnifies an insured, the insurer may pay for repairs, replacement, medical expenses, or financial judgments depending on the policy coverage.

Option A,Salvage, is the insurer’s right to recover value from damaged property after paying a claim.

Option C,Pure captive, refers to an insurance company created by a parent company to insure its own risks.

Option D,Utmost good faith, is the legal duty requiring both insurer and insured to disclose all material facts.

Only“indemnify”directly describes providing compensation for an incurred loss.

Avalued contractis one in which the insurer and insured agreein advanceon the value of the insured item. If a total loss occurs, the insurer pays this predetermined amount, regardless of the item’s actual cash value at the time of loss. This type of contract is common in areas such as fine arts, antiques, life insurance, or items whose value is difficult to measure after loss. The purpose is to eliminate disputes over valuation after a loss occurs.

Option A incorrectly describes replacement cost coverage.

Option B misstates contract rights; insureds cannot force payouts beyond contractual terms.

Option C describes structured settlements, not valued contracts.

Thus, the correct definition isD.

Pre-loss objectives in risk management are goals an organization aims to achievebeforeany loss occurs. These objectives focus on minimizing the frequency and severity of losses, ensuring preparedness, and maintaining organizational functionality.

Operational continuityis a key pre-loss objective because it emphasizes having systems, controls, and procedures in place to ensure that operations run smoothly—even when risk exposures are present. This includes safety programs, maintenance schedules, compliance measures, and contingency planning. Operational continuity ensures the business can withstand or avoid disruptions.

Option A (external obligations) is vague and not formally defined as a risk management objective.

Option B (sustained growth) and D (business development) arebusiness goals, not pre-loss risk management objectives.

Thus, the correct answer isC: Operational continuity.

In determining liability, the immediate (proximate) cause refers to the most direct, unbroken cause leading to the injury. In this sequence, the firecracker explodes in Celina’s hands immediately after she receives it from Sandra. Although Antonio initiated the chain of events and Brett contributed, their actions are more remote.

The last voluntary act that directly placed the dangerous object in the position where it caused harm was Sandra’s throw to Celina. Sandra’s action is therefore the immediate cause, even though earlier individuals may share legal responsibility in a broader causation analysis.

Option D is incorrect because Celina did not cause her own injury; she merely received the firecracker.

Option C includes Antonio and Brett, but neither was the final actor in the chain.

Therefore, the immediate cause of loss is B: Sandra.

Insurance policies require the insured to report all accidents promptly, even when they appear minor. By settling privately and failing to notify the insurer, Mark violated a fundamental policy condition. This breach is significant because it prejudices the insurer’s rights: the insurer lost the opportunity to investigate, defend, or control settlement negotiations. Under the statutory conditions (especially for automobile insurance), failure to report may result in the forfeiture of the insured’s right to recovery.

Option A is incorrect because limitation periods vary and do not automatically cause a denial; moreover, the issue is the insured's breach, not limitation law. Option C is incorrect because this is a liability claim, not accident benefits. Option D is incorrect because the current policy does not automatically cover past unreported accidents, and coverage can be denied if the insured breached statutory reporting conditions.

Thus, the insurer will most likely deny coverage because Mark forfeited his rights by failing to report the loss, making B correct.

Anet premiumis the amount remainingafter commission is deducted. Therefore, the policy premium must behigherthan the net premium, because the insurer must pay the broker their commission out of the gross premium.

Formula:

Net Premium=Policy Premium×(1−Commission Rate)\text{Net Premium} = \text{Policy Premium} \times (1 - \text{Commission Rate})Net Premium=Policy Premium×(1−Commission Rate)4,000=P×0.804,000 = P \times 0.804,000=P×0.80P=4,0000.80=5,000P = \frac{4,000}{0.80} = 5,000P=0.804,000​=5,000

Thus, the policyholder must be charged$5,000, so that:

$1,000 (20%) goes to the broker, and

$4,000 remains as the net premium for the insurer.

Correct answer:C: $5,000.

Statutory conditions exist in property insurance legislation across Canadian provinces to ensure that insurers and insureds operate withclarity, transparency, and fairness. These conditions outline important duties such as:

Requirements for notice of loss

Duties after a loss

Conditions for voiding coverage

Fraud provisions

Replacement and salvage rules

Their main purpose is toclarify the intent of the policy and give certainty to the terms and obligationsof both parties. Because statutory conditions are mandated by law, they ensure uniform standards across all insurers and prevent inconsistent or unclear policy interpretations.

Option B is only a small subset of what statutory conditions address.

Option C is incorrect—privacy legislation like PIPEDA is separate from insurance statutory conditions.

Option D is incorrect; statutory conditions do not alter legal burden-of-proof standards.

Thus, the best answer isA.

In pro rata (proportional) reinsurance, the reinsurer assumes a fixed percentage of both the risk and the premium, and in return pays the same percentage of any losses. Here, the insurer cedes 25% of the risk to the reinsurer. Therefore, the reinsurer must contribute 25% of any loss that occurs on that policy.

The loss amount is $100,000.

Reinsurer’s share = 25% × $100,000 = $25,000.

The insurer retains the remaining 75%, or $75,000. Proportional reinsurance helps insurers manage exposure by sharing both costs and losses. Options B, C, and D do not correctly reflect proportional-sharing principles. The reinsurer does not pay the full loss; it only pays its agreed percentage.

Thus, the correct answer is A: $25,000.

Apro rata cancellationoccurs when an insurer cancels a policy or when the insured cancelswithout penalty, and the insurer refunds thefullunexpired portion of the premium. The refund is calculated strictly based on time remaining in the policy period. No service charges, cancellation penalties, or retained percentages apply.

This is different fromshort rate cancellation, where a penalty is applied when the insured cancels voluntarily.

“Total rate,” “fully fixed,” and “non-adjusted rate” are not recognized forms of cancellation methods.

Thus, refunding the entire unused premium confirms the cancellation ispro rata.