S-08- Loss of Profits Insurance Mock Test 11
Loss of Profits Insurance involves important concepts such as Standard Turnover, Sum Insured, Indemnity Period, compulsory excess, variable charges, standing charges, and gross profit. Standard Turnover may be adjusted using a trend clause to reflect expected business growth. For longer indemnity periods, the Sum Insured must adequately represent the expected gross profit for the entire period. Good underwriting involves placing applicants in appropriate classifications reflecting their actual loss costs. The insured business must be fully described and premises precisely identified. Fire-related claims require appropriate audited financial statements. Variable charges generally vary directly with business volume. DSU insurance remains distinct from SCE coverage and requires separate consideration for extensions.
1. In Case Study 2, how is the Standard Turnover adjusted with the 10% trend clause?
a) Standard Turnover is reduced by 10%
b) Standard Turnover (1st Feb 2022 and 30th June 2021) plus 10% expected increase less Turnover during Indemnity Period = (20,00,000 X 110%) less 8,00,000 = 22,00,000 less 8,00,000 = Rs.14,00,000 Reduction in Turnover
c) Standard Turnover remains unchanged despite trend clause
d) Standard Turnover is doubled due to capacity enhancement
e) Standard Turnover is adjusted only if actual turnover exceeded target
2. When the indemnity period is 24 months, how should the Sum Insured be calculated?
a) The sum insured should be equal to 12 months gross profit
b) The sum insured should represent twice the annual gross profits
c) The sum insured should represent thrice the annual gross profits
d) The sum insured should be net profit only for 24 months
e) The sum insured should be 50% of two years gross profit
3. What principle does Case Study 3 illustrate regarding Fire claim within compulsory excess?
a) A FLOP claim is not payable if the SFSP claim is below excess
b) The claim of the insured under SFSP Policy is assessed and the final claim amount is within the compulsory excess to be borne by the insured, so no amount is payable under SFSP. However, the insured also lodged a FLOP claim. The condition of FLOP policy is that the claim should be payable under SFSP even if the net claim is within excess - it does not exclude cases where the net claim is within the compulsory excess to be borne by the insured
c) FLOP claim is not covered when SFSP claim is within excess
d) Both claims become nil if SFSP excess absorbs the material damage
e) FLOP policy automatically applies average if SFSP excess is triggered
4. What is the essence of good underwriting according to Chapter 3?
a) Rejecting all high-risk applicants
b) Accepting only the most profitable risks
c) Maximising premium income at all costs
d) Denying all claims to protect profits
e) Putting applicants in the classification or pool that most closely reflects the real costs of their losses
5. What is an important requirement noted about the insured's business in the Schedule?
a) The business must have a minimum turnover of Rs.10 lakhs
b) The business must be free from any prior losses
c) The business must be registered under a specific government scheme
d) It is important to note that the insured's business must be described in full and the premises precisely defined by the addresses
e) The business must have been operating for at least 3 years
6. For claims due to Fire and/or Explosion, what financial statements must the insured submit?
a) Only the current year's profit and loss account
b) Financial statements in the form of Audited/CA certified Balance sheets for preceding years (at least 3 if business is older than 3 years)
c) Only bank statements for the 12 months prior to loss
d) Only the insurance schedule showing asset values
e) Tax returns for 5 years preceding the loss
7. What items are examples of Variable Charges according to Chapter 4?
a) Purchase of raw materials - expenses incurred in producing the goods which vary in amount in direct proportion to the volume of business transacted
b) Taxes, Bank Interest, Salaries to permanent staff
c) Insurance premiums, advertising expenses and professional fees
d) Director fees, pensions and research and development expenses
e) Conveyance, stationery, postage and telephone expenses
8. What percentage do Standing Charges and Net Profit (Gross Profit) together constitute of Turnover in the example?
a) 0.1
b) 0.2
c) 0.4
d) 0.5
e) 0.3
9. In Case Study 1, what were the Claim Data details - Sum Insured, Indemnity Period, and Standard Turnover?
a) Sum Insured Rs.12L; IP 6 months; Standard Turnover Rs.24L
b) Sum Insured (Gross Profit) Rs.6,00,000; Indemnity Period 12 Months; Policy Period 01.04.2022 to 31.03.2023; Date of Loss 01.03.2023; Interruption period 1.3.2023 to 30.04.2023; Standard Turnover Rs.20,00,000
c) Sum Insured Rs.6L; IP 6 months; Standard Turnover Rs.30L
d) Sum Insured Rs.15L; IP 3 months; Standard Turnover Rs.20L
e) Sum Insured Rs.6L; IP 3 months; Standard Turnover Rs.50L
10. What does Important Note 3 say about the relationship between the Storage Cum Erection (SCE) Policy and the DSU policy?
a) The SCE policy automatically extends to cover DSU losses
b) No extension of the period of insurance under the SCE Policy shall automatically extend the period of insurance for Delay in Start-up Insurance. Any anticipated change in the scheduled date of commencement must be reported to the insurer and agreed with endorsement, and if DSU is extended, time excess and indemnity period shall be renegotiated
c) The DSU policy automatically cancels if the SCE policy expires
d) Both policies must be renewed simultaneously
e) The SCE insurer is automatically liable for DSU losses
