S-08- Loss of Profits Insurance Mock Test 13
Loss of Profits Insurance underwriting considers financial condition, replacement cost, business experience, organizational structure, sum insured adequacy, and potential claim behaviour. Loss-making businesses may be perceived as more likely to lodge claims, while longer-established businesses generally benefit from greater operational experience. Replacement cost is important where imported or obsolete machinery may be difficult to repair or replace. For shorter indemnity periods, the Sum Insured is generally based on annual gross profit. Underwriting modifications can include loss-control measures, changes in rates or limits, policy amendments, and facultative reinsurance. Surveyors must assess salvage carefully, maximize its value, and obtain the insured’s consent for disposal.
1. Why is a loss-making insured more prone to lodge insurance claims?
a) Because they have more employees
b) Because they have larger properties
c) Because they have more complex operations
d) It is a general perception that a Loss making insured is more prone to lodge insurance claims than an insured who is having sound financial condition - the Time duration factor reinforces this
e) Because they have higher premiums to pay
2. In the context of the Fire Brigade Report for claim documentation, when is it required?
a) It is always mandatory regardless of location
b) Newspaper cutting is required wherever the incidence of loss has been reported in media. Fire Brigade Report is required when the incidence of loss has been reported in media
c) Fire Brigade Report is required only for large industrial fires involving more than 10 crores of claim
d) Fire Brigade Report is mandatory only when a fatality occurs
e) Fire Brigade Report replaces the police report in all cases
3. What is Replacement Cost as an underwriting factor?
a) The cost of rebuilding a property using the same materials
b) The cost of replacing stolen items at market price
c) The cost of settling all outstanding claims
d) The fact that some insured is using imported machinery which is no longer available and may not be easy to repair or replace - this should be considered as a major underwriting factor
e) The cost of renewing an insurance policy
4. In Case Study 1, what was the total claim amount before application of the Average clause?
a) Rs. 2,50,000
b) Rs. 3,00,000
c) Rs. 3,25,000
d) Rs. 3,75,000
e) Rs. 4,00,000
5. When the indemnity period is 12 months or less, how should the Sum Insured be calculated?
a) The sum insured should represent thrice the annual gross profits
b) The sum insured should represent twice the annual gross profits
c) The sum insured should represent only the standing charges for the year
d) The sum insured should be the amount of net profit alone
e) The sum insured should be the annual amount of gross profit i.e. the annual amount of net profit and the insured standing charges
6. What is Time Duration of business as an underwriting factor?
a) The time taken to process an insurance application
b) The duration of the insurance policy
c) The time taken to settle insurance claims
d) The time for which the business has existed is determined by government regulations
e) The Time duration for which the business is in existence is a key factor - the Experience of the past makes the business more stable as compared to a new business and experience gained over years also lowers the risk of accidents
7. What is the key benefit of a well-defined organizational structure for Decision Making?
a) It guarantees the highest salary
b) It ensures all decisions are made by the CEO
c) It helps solve issues clearly - you can get a clear idea who is a better decision maker for handling a specific situation without wasting time
d) It removes the need for employee consultation
e) It automates all decisions
8. What are the four major types of modifications discussed in Chapter 3?
a) Change premium pay schedule, add endorsements, review annually and offer discounts
b) Add deductibles, remove coverage, adjust limits and change renewal terms
c) Require loss control measures; Change insurance rates, rating plans or policy limits; Amend policy terms and conditions; Use facultative reinsurance
d) Change agent, change broker, cancel policy and rewrite policy
e) Add riders, remove exclusions, extend coverage and change beneficiaries
9. In Case Study 9 (Micro Hydel Project), the insured has a sum insured of Rs.5.5 Cr. What conclusion is drawn about the adequacy of the sum insured?
a) The sum insured is adequate as it exceeds annual turnover
b) The sum insured is adequate in this case as the total turnover during the year would be less than the sum insured of Rs.5.5 Cr based on the generation data showing annual turnover of Rs.3,83,26,471.09 for the previous year
c) The sum insured is inadequate and under-insurance applies
d) The sum insured needs to be verified against future projected revenue
e) Sum insured adequacy cannot be determined without more data
10. What is the Salvage requirement under the Survey Assessment Report and who must consent to its disposal?
a) Salvage must be destroyed and cannot be sold
b) Surveyors should ensure that the best salvage value is realised and adjusted. The salvage disposal is governed by the CVC Guidelines. The disposal of salvage has to be done with the consent of the insured as well, and the insured has every right to retain the salvage at the same price or more which the salvage can fetch in the open market
c) Salvage belongs entirely to the insurer after a claim is paid
d) Salvage disposal is handled exclusively by the insurance company
e) The government takes possession of all salvage items after fire claims
