S-08- Loss of Profits Insurance Mock Test 07
Loss of Profits and Business Interruption Insurance requires accurate assessment of gross profit, sum insured, risk classification, and potential losses. Under-insurance occurs when the sum insured is lower than the appropriate gross profit, potentially reducing claim recovery. MLOP policies contain strict conditions regarding fraudulent claims, where fraudulent acts can result in forfeiture of policy benefits. Underwriters consider loss perception and probable maximum loss when assessing risks. The business environment includes suppliers, competitors, customers, government, media, investors, and economic conditions. The term underwriter originated from risk-takers writing their names under the amount of risk accepted. ALOP/DSU assessment also considers Take-or-pay provisions and delay-related financial consequences.
1. In Case Study 11 (Application of Under Insurance), what was the actual Gross Profit (Sum Insured should have been) and what was the Sum Insured taken?
a) Actual GP Rs.6 Cr, Sum Insured should be Rs.6 Cr
b) Actual GP Rs.9 Cr, Sum Insured should be Rs.9 Cr but only Rs.6 Cr was taken. The under-insurance percentage is calculated as (9,00,00,000 - 6,00,00,000) / 9,00,00,000 X 100 = 33.33%
c) Actual GP Rs.12 Cr, Sum Insured should be Rs.12 Cr but only Rs.6 Cr taken
d) Actual GP Rs.6 Cr, Sum Insured Rs.9 Cr (over-insured)
e) Actual GP Rs.5 Cr, Sum Insured Rs.4 Cr
2. Under Condition (i) regarding fraudulent claims under the MLOP policy, what happens if a fraudulent claim is made?
a) The insurer refunds all previously paid premiums
b) If the claim be in any respect fraudulent or if false declarations are made or fraudulent means/devices used, or if the Accident was occasioned by wilful act or with the connivance of the insured, all benefit under this Policy shall be forfeited
c) Only the fraudulent portion of the claim is disallowed
d) The policy premium is doubled for the next year
e) A fraud investigation report must be submitted to the police
3. What is Loss Perception and Probable Maximum Loss as an underwriting factor?
a) How the agent perceives the likelihood of a claim
b) How competitors perceive the risk
c) How regulators perceive the safety of the business
d) How the government perceives the financial stability of the business
e) This is an important factor while underwriting the risk - the underwriters consider what the portion of the loss is per claim during the policy period; if loss perception is high then the risk may be refused or suitably amended; knowledge of possible maximum loss during the policy period is also important
4. What are the forces that constitute the Business Environment?
a) Only customers and suppliers
b) Suppliers, competitors, media, government, customers, economic conditions, investors and multiple other institutions working externally
c) Only internal employees and management
d) Only government and regulatory bodies
e) Only financial institutions and investors
5. What is the origin of the term underwriter?
a) From writing insurance policies
b) From signing contracts below signature
c) From ancient Roman practices
d) From the practice of having each risk-taker write their name under the total amount of risk they were willing to accept for a specified premium
e) From writing checks for claims
6. What must the underwriter decide when selecting an underwriting alternative?
a) To always accept the submission as offered
b) To always reject all high-risk submissions
c) To always require maximum modifications
d) Whether to accept the submission as offered, accept it with modifications or reject it - underwriters try to make the submission acceptable because one of the insurers goals is to produce profitable business
e) To always offer the lowest possible premium
7. What does the Specification of the Consequential Loss Policy provide?
a) The specification provides only the premium calculation method
b) The specification provides only the claims settlement procedure
c) The specification provides only the exclusions from coverage
d) The specification is an important part of the policy and provides for: items insured under the policy and the relative sums insured (e.g. Gross Profit, Wages and Auditors Fees), Definitions and a formula for ascertaining the liability for any loss
e) The specification provides only the list of approved service providers
8. What adverse results can misclassification of risk produce?
a) Only minor administrative inconvenience
b) Only a slightly higher premium for the insured
c) Insufficient premium to cover losses and expenses; inability to sell policies because prices are higher than competitors; charges that the insurer has violated regulations prohibiting unfair trade practices
d) Only a slightly lower profit margin
e) Only the need to renegotiate the policy at renewal
9. Until the 1940s in the United States, Business Interruption Insurance continued to be known as:
a) Consequential Loss Insurance
b) Profits Insurance
c) Use and Occupancy Insurance
d) Loss of Profits Insurance
e) Fire Loss Indemnity
10. What does the Take-or-pay provision mentioned in the chapter relate to in the context of ALOP/DSU?
a) A provision allowing the insured to take or pay the premium in installments
b) Particular attention needs to be paid to any Take-or-pay provision in the Fuel Supply Agreements (if any) and possible delay-linked penalties for failure to supply the finished product to the specified buyers, as this affects the financial impact on the project when assessing indemnity period
c) A payment arrangement between insurer and insured for claims
d) A provision allowing the contractor to take or pay delay damages
e) A government regulation requiring minimum fuel supply contracts
