S-08- Loss of Profits Insurance Mock Test 06
Underwriting for Loss of Profits Insurance considers several factors, including the financial condition of the insured, location of the risk, internal and external business environments, and expected loss experience. A financially sound business is generally more desirable than a loss-making business. Increased Cost of Working refers to abnormal expenditure incurred to maintain business operations and minimize loss. The objective of underwriting is to create categories of insureds whose actual loss experience closely approximates expected experience. The indemnity period limits claim payments. Underwriters evaluate alternatives before accepting risks. MLOP policies may permit midterm increases in sum insured subject to specified conditions and restrictions.
1. What is the Financial Condition of the business as an underwriting factor?
a) A loss making insured is always preferred as they need more insurance
b) The present financial condition of the insured is an important factor - the financially sound insured is more welcome than a loss making insured
c) Only profitable businesses can be insured
d) Financial condition does not affect underwriting decisions
e) Only businesses with bank loans can be insured
2. What is Increased Cost of Working?
a) The cost of rebuilding after a fire
b) The cost of repairing damaged machinery
c) The cost of replacing destroyed stock
d) This is the abnormal expenditure incurred by the insured to maintain the business as far as possible at its normal level so that the loss under net profit and standing charges is avoided or at least minimised - examples include rent for temporary premises, overtime charges for machinery and sub-contracting costs
e) The cost of settling fire insurance claims
3. How many types of internal environment factors are there according to Chapter 2?
a) 8
b) 10
c) 14
d) 12
e) 16
4. What is the objective of underwriting in terms of pool of insureds?
a) To produce a pool of only the safest risks
b) To produce a pool of the wealthiest insureds
c) To produce a pool of insureds by categories whose actual loss experience will closely approximate the expected loss experience of a given hypothetical pool of insureds
d) To produce a pool of insureds who never make claims
e) To produce a pool of insureds without any classification
5. What principle does Case Study 5 illustrate regarding Business Interruption exceeding the indemnity period?
a) All months of interruption are payable regardless of policy terms
b) The insured has claimed that following a fire the business was interrupted for a period of 6 Months and has accordingly lodged a claim for Loss of profit for 6 Months. As per the FLOP Policy the indemnity period is 3 Months only. Accordingly, the claim of the insured shall be payable for only 3 Months of interruption less excess as per the policy
c) The insured can claim for the full period of interruption if it was caused by fire
d) The insurer must pay for all months beyond the indemnity period as well
e) The indemnity period is automatically extended if the business cannot restart
6. In 1880, which insurance agent from Boston (USA) introduced the expression 'use and occupancy'?
a) Cuthbert Heath
b) Ludovio MacLellan Mann
c) Steve Haase
d) Dalton
e) John Hay
7. What is the difference between a risk in a flood-prone area vs a high-risk area in location underwriting?
a) Both flood-prone and high-risk areas get the same premium
b) A flood-prone area is safer than a high-risk area
c) A flood-prone area and high-risk area are the same for underwriting
d) A risk located in flood prone area is more prone to losses on account of floods while another risk located near a High risk area (such as near a Fire crackers making unit) may not be attractive because of its location
e) Both areas are rejected by underwriters
8. In Case Study 1, what type of business does Mr. X own and what peril caused the loss?
a) A manufacturing unit damaged by machinery breakdown
b) A Retail Grocery Store where there was a fire causing material loss to stock, building, furniture, fixtures and fittings
c) A textile spinning unit damaged by flood
d) A cold rolling mill affected by power failure
e) A hydroelectric project affected by flood
9. What does Step 2 in the underwriting decision process involve?
a) Collecting premium from policyholders
b) Setting up marketing campaigns
c) Filing claims on behalf of policyholders
d) Issuing new policy documents
e) Determining underwriting alternatives - the underwriter must choose the optimal one under the applicable circumstances
10. What does Condition (m) - Midterm Increase in Sum Insured - allow under the MLOP policy?
a) The policy permits midterm increase in sum insured provided there is no reported loss under the policy, and such increase in sum insured shall not be effective retrospectively
b) The insured can decrease the sum insured at midterm without penalty
c) Midterm increases are always retrospective from the inception of the policy
d) The insurer can increase the sum insured unilaterally at any time
e) Sum insured can only be changed at annual renewal
