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IIQE- paper 3
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- Question 1 of 30
1. Question
What is the definition of life insurance?
CorrectIn the first of an excellent series of textbooks produced by the U.S. Life Office Management Association Inc. (LOMA), life insurance (or ‘life assurance’ in British terminology) is defined as follows: “Life insurance provides a sum of money if the person who is insured dies whilst the policy is in effect.”
IncorrectIn the first of an excellent series of textbooks produced by the U.S. Life Office Management Association Inc. (LOMA), life insurance (or ‘life assurance’ in British terminology) is defined as follows: “Life insurance provides a sum of money if the person who is insured dies whilst the policy is in effect.”
- Question 2 of 30
2. Question
As life insurance became more established, it was realised what a useful tool it was for a number of situations, which would include:
I. Temporary needs/threats
II. Financial hardship
III. Investment
IV. RetirementCorrectAs life insurance became more established, it was realised what a useful tool it was for a number of situations, which would include:
(a) Temporary needs/threats: the original purpose of life insurance remains an important element in life insurance and estate planning, as things like children’s education, etc. occupy responsible people’s thoughts.
(b) Savings: providing for one’s family and oneself, as a long-term exercise, becomes more and more relevant as society evolves from a tribal, clan, family orientated community to relatively affluent individual independence.
(c) Investment: can be defined as a process of purchasing an asset, with an expectation that it will in the future provide an income or appreciate. The accumulation of wealth and safeguarding it from the ravages of inflation become realistic goals as living standards rise.
(d) Retirement: provision for one’s own later years becomes increasingly necessary, especially in a changing cultural and social environment.IncorrectAs life insurance became more established, it was realised what a useful tool it was for a number of situations, which would include:
(a) Temporary needs/threats: the original purpose of life insurance remains an important element in life insurance and estate planning, as things like children’s education, etc. occupy responsible people’s thoughts.
(b) Savings: providing for one’s family and oneself, as a long-term exercise, becomes more and more relevant as society evolves from a tribal, clan, family orientated community to relatively affluent individual independence.
(c) Investment: can be defined as a process of purchasing an asset, with an expectation that it will in the future provide an income or appreciate. The accumulation of wealth and safeguarding it from the ravages of inflation become realistic goals as living standards rise.
(d) Retirement: provision for one’s own later years becomes increasingly necessary, especially in a changing cultural and social environment. - Question 3 of 30
3. Question
The modern scene tends to look upon available life insurance products from the perspective of meeting various needs. These we may think of as:
Correctthe modern scene tends to look upon available life insurance products from the perspective of meeting various needs. These we may think of as:
(a) Personal needs:
(i) dependants’ living expenses;
(ii) final (end of life) expenses;
(iii) educational funds;
(iv) retirement income;
(v) mortgage repayment fund;
(vi) emergencies fund (usually needed to meet unexpected expenses);
(vii) disability income.
(b) Business needs:
(i) key persons;
(ii) business owners;
(iii) partnerships;
(iv) employee benefits.Incorrectthe modern scene tends to look upon available life insurance products from the perspective of meeting various needs. These we may think of as:
(a) Personal needs:
(i) dependants’ living expenses;
(ii) final (end of life) expenses;
(iii) educational funds;
(iv) retirement income;
(v) mortgage repayment fund;
(vi) emergencies fund (usually needed to meet unexpected expenses);
(vii) disability income.
(b) Business needs:
(i) key persons;
(ii) business owners;
(iii) partnerships;
(iv) employee benefits. - Question 4 of 30
4. Question
The modern scene tends to look upon available life insurance products from the perspective of meeting various needs. These we may think of as personal needs and business needs.Which of the following are personal needs?
I. key persons
II. disability income
III. mortgage repayment fund
IV. dependants’ living expensesCorrect(a) Personal needs:
(i) dependants’ living expenses;
(ii) final (end of life) expenses;
(iii) educational funds;
(iv) retirement income;
(v) mortgage repayment fund;
(vi) emergencies fund (usually needed to meet unexpected expenses);
(vii) disability income.Incorrect(a) Personal needs:
(i) dependants’ living expenses;
(ii) final (end of life) expenses;
(iii) educational funds;
(iv) retirement income;
(v) mortgage repayment fund;
(vi) emergencies fund (usually needed to meet unexpected expenses);
(vii) disability income. - Question 5 of 30
5. Question
Which of the followings is not Principle Of Life Insurance?
CorrectIn the Core Subject for this Insurance Intermediaries Quality Assurance Scheme, “Principles and Practice of Insurance”, the principles of insurance were studied in detail. By way of reminder, but not detailed comment at this stage, these principles are:
(a) Insurable Interest: the legal right to insure;
(b) Utmost Good Faith: a duty to reveal material information actively;
(c) Proximate Cause: determining the effective cause of a loss in the context of insurance claims;
(d) Indemnity: the insurer providing an exact financial compensation;
(e) Contribution: insurers sharing an indemnity payment;
(f) Subrogation: the indemnifying insurer taking over and then exercising the insured’s rights of recovery against third parties.IncorrectIn the Core Subject for this Insurance Intermediaries Quality Assurance Scheme, “Principles and Practice of Insurance”, the principles of insurance were studied in detail. By way of reminder, but not detailed comment at this stage, these principles are:
(a) Insurable Interest: the legal right to insure;
(b) Utmost Good Faith: a duty to reveal material information actively;
(c) Proximate Cause: determining the effective cause of a loss in the context of insurance claims;
(d) Indemnity: the insurer providing an exact financial compensation;
(e) Contribution: insurers sharing an indemnity payment;
(f) Subrogation: the indemnifying insurer taking over and then exercising the insured’s rights of recovery against third parties. - Question 6 of 30
6. Question
Which of the following match are correct?
I. Insurable Interest: the legal right to insure
II. Proximate Cause: determining the effective cause of a loss in the context of insurance claims
III. Utmost Good Faith: a duty to reveal material information actively
IV. Indemnity: the indemnifying insurer taking over and then exercising the insured’s rights of recovery against third partiesCorrect(a) Insurable Interest: the legal right to insure;
(b) Utmost Good Faith: a duty to reveal material information actively;
(c) Proximate Cause: determining the effective cause of a loss in the context of insurance claims;
(d) Indemnity: the insurer providing an exact financial compensation;
(e) Contribution: insurers sharing an indemnity payment;
(f) Subrogation: the indemnifying insurer taking over and then exercising the insured’s rights of recovery against third parties.Incorrect(a) Insurable Interest: the legal right to insure;
(b) Utmost Good Faith: a duty to reveal material information actively;
(c) Proximate Cause: determining the effective cause of a loss in the context of insurance claims;
(d) Indemnity: the insurer providing an exact financial compensation;
(e) Contribution: insurers sharing an indemnity payment;
(f) Subrogation: the indemnifying insurer taking over and then exercising the insured’s rights of recovery against third parties. - Question 7 of 30
7. Question
Which of the following about Insurable Interest are incorrect?
CorrectInsurable Interest In simple terms, insurable interest is such relationship with the subject matter of insurance (a person’s life, in the case of life insurance) that is recognised at law or in equity as giving rise to a right to insure that person’s life. This is a concept that has applied for two and a half centuries in England and is obviously based on common sense. If you have no relationship with a given person, why should you have the right to insure his life and thus gain from his death? Some particular points to be noted with this principle are: (a) Statutory requirement: in life insurance, the requirement for an insurable interest is derived from section 64B of the Insurance Ordinance. (b) Effect of lack of insurable interest: Section 64B renders a contract of life insurance void where the person for whose use or benefit or on whose account it is made has no interest. (c) Insurable interest in oneself and in spouse: it is judicially presumed that we all have an insurable interest in our own lives for an unlimited amount, and that any one person has an insurable interest for an unlimited amount in the life of his or her spouse, so that no proof of such an interest is required.
IncorrectInsurable Interest In simple terms, insurable interest is such relationship with the subject matter of insurance (a person’s life, in the case of life insurance) that is recognised at law or in equity as giving rise to a right to insure that person’s life. This is a concept that has applied for two and a half centuries in England and is obviously based on common sense. If you have no relationship with a given person, why should you have the right to insure his life and thus gain from his death? Some particular points to be noted with this principle are: (a) Statutory requirement: in life insurance, the requirement for an insurable interest is derived from section 64B of the Insurance Ordinance. (b) Effect of lack of insurable interest: Section 64B renders a contract of life insurance void where the person for whose use or benefit or on whose account it is made has no interest. (c) Insurable interest in oneself and in spouse: it is judicially presumed that we all have an insurable interest in our own lives for an unlimited amount, and that any one person has an insurable interest for an unlimited amount in the life of his or her spouse, so that no proof of such an interest is required.
- Question 8 of 30
8. Question
With the exceptions of insurable interests founded on judicial presumptions or statute as case law reveals, there must be an interest which is capable of valuation in money. Some examples which may be reasonably common are:
I. debtor
II. business partners
III. contractual relationshipCorrectInsurable interest in others: with the exceptions of insurable interests founded on judicial presumptions (see (c) above) or statute (see (f) below), as case law reveals, there must be an interest which is capable of valuation in money. Some examples which may be reasonably common are: (i) debtors: if a person owes you money, you may insure his life for the amount of the loan, plus accrued interests; (ii) business partners: especially where personal services are involved, such as performers and musicians; (iii) contractual relationships: if another person’s services have been engaged under contract (booking a singer for a concert, a professional sportsperson, etc.), that person’s death may cause the other contracting party to suffer financially. That potential loss is insurable
IncorrectInsurable interest in others: with the exceptions of insurable interests founded on judicial presumptions (see (c) above) or statute (see (f) below), as case law reveals, there must be an interest which is capable of valuation in money. Some examples which may be reasonably common are: (i) debtors: if a person owes you money, you may insure his life for the amount of the loan, plus accrued interests; (ii) business partners: especially where personal services are involved, such as performers and musicians; (iii) contractual relationships: if another person’s services have been engaged under contract (booking a singer for a concert, a professional sportsperson, etc.), that person’s death may cause the other contracting party to suffer financially. That potential loss is insurable
- Question 9 of 30
9. Question
When is the interest needed?
CorrectWhen is the interest needed?: this is a key question, and very important consequences flow from its answer. The answer is that an insurable interest is only needed when the contract begins, and becomes irrelevant thereafter
IncorrectWhen is the interest needed?: this is a key question, and very important consequences flow from its answer. The answer is that an insurable interest is only needed when the contract begins, and becomes irrelevant thereafter
- Question 10 of 30
10. Question
What could be the consequences of an insurable interest is only needed when the contract begins, and becomes irrelevant thereafter?
I. a spouse, who insures his/her spouse and then becomes divorced, can keep the policy in force and be perfectly entitled to collect the benefit in due time
II. it is legally possible to insure your debtor’s life, have the debt repaid, keep the policy in force, and be “paid again” in due time by the insurer
III. a policyowner is capable of assigning a properly arranged life insurance contract to a third party even though the latter has no insurable interest in the life insured.
IV. who insures business partners but after dismissal of business partnership, can keep the policy in force and able to collect the benefits in due timeCorrectWhen is the interest needed?: this is a key question, and very important consequences flow from its answer. The answer is that an insurable interest is only needed when the contract begins, and becomes irrelevant thereafter. What could be the (quite legal) consequences of this? Some examples are: (i) Divorce: a spouse, who insures his/her spouse and then becomes divorced, can keep the policy in force and be perfectly entitled to collect the benefit in due time. (ii) Debts: it is legally possible to insure your debtor’s life, have the debt repaid, keep the policy in force, and be “paid again” in due time by the insurer. (iii) Assignment: a policyowner is capable of assigning a properly arranged life insurance contract to a third party even though the 1/5 latter has no insurable interest in the life insured, provided that this is not a premeditated act of getting round the requirement for an insurable interest. The latter act will be ineffective on the grounds that it is done for the purpose of defeating the object of a statute, and the contract is indeed void as from inception because the de facto insured (i.e. the intended assignee) has not the required insurable interest. Therefore, what matters is the intention of the policyowner when he is effecting a life policy. Taking out a life policy with the general intention of assigning it is legitimate, but doing so with the intention of assigning it to a specific person who has no insurable interest in the life insured is another matter.
IncorrectWhen is the interest needed?: this is a key question, and very important consequences flow from its answer. The answer is that an insurable interest is only needed when the contract begins, and becomes irrelevant thereafter. What could be the (quite legal) consequences of this? Some examples are: (i) Divorce: a spouse, who insures his/her spouse and then becomes divorced, can keep the policy in force and be perfectly entitled to collect the benefit in due time. (ii) Debts: it is legally possible to insure your debtor’s life, have the debt repaid, keep the policy in force, and be “paid again” in due time by the insurer. (iii) Assignment: a policyowner is capable of assigning a properly arranged life insurance contract to a third party even though the 1/5 latter has no insurable interest in the life insured, provided that this is not a premeditated act of getting round the requirement for an insurable interest. The latter act will be ineffective on the grounds that it is done for the purpose of defeating the object of a statute, and the contract is indeed void as from inception because the de facto insured (i.e. the intended assignee) has not the required insurable interest. Therefore, what matters is the intention of the policyowner when he is effecting a life policy. Taking out a life policy with the general intention of assigning it is legitimate, but doing so with the intention of assigning it to a specific person who has no insurable interest in the life insured is another matter.
- Question 11 of 30
11. Question
Which of the following are important points of Duty of Disclosure?
I. what to disclose
II. medical & non-medical application
III. breach of the duty on the part of the policy owner
IV. medical testCorrectDuty of Disclosure This concerns another important insurance principle, that of utmost good faith. Put simply, utmost good faith requires the applicant to disclose all material facts, whether the insurer requests them or not. A material fact is legally defined as ‘every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will accept the risk’. Some points to note:
(a) What to disclose: clearly, the insurer wishes to know all important facts, but you cannot be expected to disclose what you reasonably cannot be expected to know. Some conditions, for example, may be easily recognisable to qualified doctors, but the average layman cannot be expected to self-diagnose and reveal such things
(b) Non-medical application: if the insurance is arranged without a physical examination of the applicant, the insurer will normally have great difficulty alleging non-disclosure of a material fact not covered by questions on the application or the personal physician’s form.
(c) Medical application: if the insurance is arranged with a physical examination of the applicant, the insurer cannot hold against the applicant negligent omissions or mis-diagnosing by the medically qualified person concerned.
(d) Medical tests: the insurer’s requests to supplement information supplied verbally with reasonable medical examinations or tests are normally met, but great care must be taken not to breach the Personal Data (Privacy) Ordinance, which has the effect of requiring insurers to explain the need for gathering information before any testing takes place. The subject of the tests also has the right under that Ordinance to be told their results.
(e) Breach of the duty on the part of the policyowner: at law, a breach of utmost good faith renders the contract voidable by the insurer. But with most life policies in Hong Kong, regard has to be taken of a policy condition known as an Incontestability Provision, which states that the insurer will not contest the policy after it has been in force for a specified period (contestable period), unless there is proof of fraud on the part of the policyowner (see 4.2 for more details).IncorrectDuty of Disclosure This concerns another important insurance principle, that of utmost good faith. Put simply, utmost good faith requires the applicant to disclose all material facts, whether the insurer requests them or not. A material fact is legally defined as ‘every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will accept the risk’. Some points to note:
(a) What to disclose: clearly, the insurer wishes to know all important facts, but you cannot be expected to disclose what you reasonably cannot be expected to know. Some conditions, for example, may be easily recognisable to qualified doctors, but the average layman cannot be expected to self-diagnose and reveal such things
(b) Non-medical application: if the insurance is arranged without a physical examination of the applicant, the insurer will normally have great difficulty alleging non-disclosure of a material fact not covered by questions on the application or the personal physician’s form.
(c) Medical application: if the insurance is arranged with a physical examination of the applicant, the insurer cannot hold against the applicant negligent omissions or mis-diagnosing by the medically qualified person concerned.
(d) Medical tests: the insurer’s requests to supplement information supplied verbally with reasonable medical examinations or tests are normally met, but great care must be taken not to breach the Personal Data (Privacy) Ordinance, which has the effect of requiring insurers to explain the need for gathering information before any testing takes place. The subject of the tests also has the right under that Ordinance to be told their results.
(e) Breach of the duty on the part of the policyowner: at law, a breach of utmost good faith renders the contract voidable by the insurer. But with most life policies in Hong Kong, regard has to be taken of a policy condition known as an Incontestability Provision, which states that the insurer will not contest the policy after it has been in force for a specified period (contestable period), unless there is proof of fraud on the part of the policyowner (see 4.2 for more details). - Question 12 of 30
12. Question
Which of the following are incorrect?
Correct(a) What to disclose: clearly, the insurer wishes to know all important facts, but you cannot be expected to disclose what you reasonably cannot be expected to know. Some conditions, for example, may be easily recognisable to qualified doctors, but the average layman cannot be expected to self-diagnose and reveal such things
(b) Non-medical application: if the insurance is arranged without a physical examination of the applicant, the insurer will normally have great difficulty alleging non-disclosure of a material fact not covered by questions on the application or the personal physician’s form.
(c) Medical application: if the insurance is arranged with a physical examination of the applicant, the insurer cannot hold against the applicant negligent omissions or mis-diagnosing by the medically qualified person concerned.
(d) Medical tests: the insurer’s requests to supplement information supplied verbally with reasonable medical examinations or tests are normally met, but great care must be taken not to breach the Personal Data (Privacy) Ordinance, which has the effect of requiring insurers to explain the need for gathering information before any testing takes place. The subject of the tests also has the right under that Ordinance to be told their results.
(e) Breach of the duty on the part of the policyowner: at law, a breach of utmost good faith renders the contract voidable by the insurer. But with most life policies in Hong Kong, regard has to be taken of a policy condition known as an Incontestability Provision, which states that the insurer will not contest the policy after it has been in force for a specified period (contestable period), unless there is proof of fraud on the part of the policyowner (see 4.2 for more details).Incorrect(a) What to disclose: clearly, the insurer wishes to know all important facts, but you cannot be expected to disclose what you reasonably cannot be expected to know. Some conditions, for example, may be easily recognisable to qualified doctors, but the average layman cannot be expected to self-diagnose and reveal such things
(b) Non-medical application: if the insurance is arranged without a physical examination of the applicant, the insurer will normally have great difficulty alleging non-disclosure of a material fact not covered by questions on the application or the personal physician’s form.
(c) Medical application: if the insurance is arranged with a physical examination of the applicant, the insurer cannot hold against the applicant negligent omissions or mis-diagnosing by the medically qualified person concerned.
(d) Medical tests: the insurer’s requests to supplement information supplied verbally with reasonable medical examinations or tests are normally met, but great care must be taken not to breach the Personal Data (Privacy) Ordinance, which has the effect of requiring insurers to explain the need for gathering information before any testing takes place. The subject of the tests also has the right under that Ordinance to be told their results.
(e) Breach of the duty on the part of the policyowner: at law, a breach of utmost good faith renders the contract voidable by the insurer. But with most life policies in Hong Kong, regard has to be taken of a policy condition known as an Incontestability Provision, which states that the insurer will not contest the policy after it has been in force for a specified period (contestable period), unless there is proof of fraud on the part of the policyowner (see 4.2 for more details). - Question 13 of 30
13. Question
Which of the following about Proximate cause are incorrect?
CorrectProximate cause: this principle is concerned with the identification of the dominant, effective cause of the loss being claimed for under the insurance. The principle does apply to every class of business, but it is very likely to have rather less significance with life insurance partly because of the minimal use of exclusions. The application of proximate cause is very much concerned with different kinds of perils
IncorrectProximate cause: this principle is concerned with the identification of the dominant, effective cause of the loss being claimed for under the insurance. The principle does apply to every class of business, but it is very likely to have rather less significance with life insurance partly because of the minimal use of exclusions. The application of proximate cause is very much concerned with different kinds of perils
- Question 14 of 30
14. Question
The application of proximate cause is very much concerned with different kinds of perils, which include:
I. Insured perils
II. Uninsured perils
III. expected perils
IV. Excluded perilsCorrectThe application of proximate cause is very much concerned with different kinds of perils (i.e. causes of loss):
(i) Insured Perils: are those which are covered by the policy. Nonlife policies may specify the perils which are covered, and one of those must be the proximate cause of the loss or it is irrecoverable. In life insurance, the cause of death is not critical, unless a suicide exclusion clause operates or an accidental death benefit rider applies.
(ii) Excepted (or Excluded) Perils: in non-life insurance, all policies carry some exclusions. If one of these operates with a claim, the insurer is not liable for the whole of or part of the loss, depending on the specifics of the exclusion. Life insurance policies seldom have exclusions (but see Note 1 below).
(iii) Uninsured Perils: these are causes of loss which are neither included nor excluded, for example water damage with fire insurance. If property is damaged by water (e.g. by rain) with no other cause involved, the damage is not covered. But if the water damage is proximately caused by an insured peril (say fireman fighting a fire with water hoses), the water damage is covered. Such complexities are unlikely to arise with life insurance claims.IncorrectThe application of proximate cause is very much concerned with different kinds of perils (i.e. causes of loss):
(i) Insured Perils: are those which are covered by the policy. Nonlife policies may specify the perils which are covered, and one of those must be the proximate cause of the loss or it is irrecoverable. In life insurance, the cause of death is not critical, unless a suicide exclusion clause operates or an accidental death benefit rider applies.
(ii) Excepted (or Excluded) Perils: in non-life insurance, all policies carry some exclusions. If one of these operates with a claim, the insurer is not liable for the whole of or part of the loss, depending on the specifics of the exclusion. Life insurance policies seldom have exclusions (but see Note 1 below).
(iii) Uninsured Perils: these are causes of loss which are neither included nor excluded, for example water damage with fire insurance. If property is damaged by water (e.g. by rain) with no other cause involved, the damage is not covered. But if the water damage is proximately caused by an insured peril (say fireman fighting a fire with water hoses), the water damage is covered. Such complexities are unlikely to arise with life insurance claims. - Question 15 of 30
15. Question
Which of the following about indemnity are incorrect?
CorrectIndemnity: this means an exact financial compensation for the loss sustained and is very important in most types of General Insurance. As far as life insurance is concerned, however, (i) it is immediately obvious that the policy proceeds (or ‘insurance proceeds’) in no way pretend to (or can) represent an exact financial compensation. That is why life policies are called benefit policies, not indemnity policies; (ii) it is impossible to over indemnify. It is because the insurable interests (closely linked with indemnity) in the majority of cases is unlimited (see 1.2.1(c)).
IncorrectIndemnity: this means an exact financial compensation for the loss sustained and is very important in most types of General Insurance. As far as life insurance is concerned, however, (i) it is immediately obvious that the policy proceeds (or ‘insurance proceeds’) in no way pretend to (or can) represent an exact financial compensation. That is why life policies are called benefit policies, not indemnity policies; (ii) it is impossible to over indemnify. It is because the insurable interests (closely linked with indemnity) in the majority of cases is unlimited (see 1.2.1(c)).
- Question 16 of 30
16. Question
Which of the following are indemnity corollaries ?
I. subrogation
II. substitution
III. contributionCorrectIndemnity corollaries: a corollary is a sub-principle and indemnity has two corollaries, Contribution and Subrogation.
(i) Contribution: in most General Insurance classes, if by some chance a person has more than one policy covering a loss, he does 1/10 not get paid twice. Each policy contributes to (shares) the loss rateably. On the other hand, if the insured has effected more than one policy purposely, a vigilant claims handler might well take that as an indication of fraud! Life insurance policies are normally not subject to the principle of indemnity, so it is quite normal for a person to have more than one life policy and each must pay in full upon the insured event happening.
(ii) Subrogation: this relates to the legal right of the insurer who has provided an indemnity to take over any remedies the “policyholder” (the UK equivalent of the American term “policyowner”) possesses against third parties, to seek to recover his payment to the policyholder. This does not apply to life insurance.IncorrectIndemnity corollaries: a corollary is a sub-principle and indemnity has two corollaries, Contribution and Subrogation.
(i) Contribution: in most General Insurance classes, if by some chance a person has more than one policy covering a loss, he does 1/10 not get paid twice. Each policy contributes to (shares) the loss rateably. On the other hand, if the insured has effected more than one policy purposely, a vigilant claims handler might well take that as an indication of fraud! Life insurance policies are normally not subject to the principle of indemnity, so it is quite normal for a person to have more than one life policy and each must pay in full upon the insured event happening.
(ii) Subrogation: this relates to the legal right of the insurer who has provided an indemnity to take over any remedies the “policyholder” (the UK equivalent of the American term “policyowner”) possesses against third parties, to seek to recover his payment to the policyholder. This does not apply to life insurance. - Question 17 of 30
17. Question
The classic criteria usually applied to life insurance premiums are that they should be:
I. adequate: so that the insurer will have money to pay the benefit and meet other obligations under the contract
II. equitable : so that each policyowner is paying an amount in line with the risk and contracted benefits
III. fair : each policyowner will paying an amount in line with the risk and contracted benefitsCorrectThe classic criteria usually applied to life insurance premiums are that they should be: (a) adequate: so that the insurer will have money to pay the benefit and meet other obligations under the contract; and (b) equitable (fair): so that each policyowner is paying an amount in line with the risk and contracted benefits. To achieve these criteria, a number of factors must be taken into account in the course of rating.
IncorrectThe classic criteria usually applied to life insurance premiums are that they should be: (a) adequate: so that the insurer will have money to pay the benefit and meet other obligations under the contract; and (b) equitable (fair): so that each policyowner is paying an amount in line with the risk and contracted benefits. To achieve these criteria, a number of factors must be taken into account in the course of rating.
- Question 18 of 30
18. Question
Which of the following about mortality, interest and expenses are incorrect?
CorrectMortality: perhaps more accurately phrased as the Rate of Mortality, this indicates the rate at which insured lives are expected to die. Whilst this sounds very morbid, it will be immediately obvious that this is absolutely at the heart of life insurance premium calculation. To know, on average, when the life to be insured may be expected to die is a crucial factor in determining the correct premium to charge. Of course, individual lives may live much longer or shorter than the average, but following the “law of averages” (which is sometimes called the “law of large numbers”) reasonable predictions and calculations can be made. These are greatly facilitated by the use of mortality tables, which are published tables showing the expected rate of mortality at any given age. As mentioned above, individual risks may call for special terms and consideration, but that is an underwriting matter. Premium rating using mortality tables merely deals with normal risks and normal expectations. (b)
Interest: in very simple terms, life insurance involves collecting money now and at specified intervals, to provide for a benefit at some time or upon some event in the future. This, by definition, means we have some time, and as the old saying goes “time is money”! How much time we have, on average, largely concerns (a) above. The fact that we have some time means that we have an opportunity for investment. The interest to be earned on invested premiums is another crucial factor in determining premium rates. If a particular insurer is anticipating above average returns of investment, it can charge lower premium rates than a fair number of its competitors, and/or make more profit for its shareholders.IncorrectMortality: perhaps more accurately phrased as the Rate of Mortality, this indicates the rate at which insured lives are expected to die. Whilst this sounds very morbid, it will be immediately obvious that this is absolutely at the heart of life insurance premium calculation. To know, on average, when the life to be insured may be expected to die is a crucial factor in determining the correct premium to charge. Of course, individual lives may live much longer or shorter than the average, but following the “law of averages” (which is sometimes called the “law of large numbers”) reasonable predictions and calculations can be made. These are greatly facilitated by the use of mortality tables, which are published tables showing the expected rate of mortality at any given age. As mentioned above, individual risks may call for special terms and consideration, but that is an underwriting matter. Premium rating using mortality tables merely deals with normal risks and normal expectations. (b)
Interest: in very simple terms, life insurance involves collecting money now and at specified intervals, to provide for a benefit at some time or upon some event in the future. This, by definition, means we have some time, and as the old saying goes “time is money”! How much time we have, on average, largely concerns (a) above. The fact that we have some time means that we have an opportunity for investment. The interest to be earned on invested premiums is another crucial factor in determining premium rates. If a particular insurer is anticipating above average returns of investment, it can charge lower premium rates than a fair number of its competitors, and/or make more profit for its shareholders. - Question 19 of 30
19. Question
What are the factors produce Pure Premium?
I. Mortality
II. Interest
III. ExpensesCorrectThe two factors ( Mortality & interest )combined will produce what is called the net premium (sometimes called the pure premium), i.e. the money required to be collected from the policyowners just to meet death claims arising in the future under normal statistical expectations. But there is more to consider.
IncorrectThe two factors ( Mortality & interest )combined will produce what is called the net premium (sometimes called the pure premium), i.e. the money required to be collected from the policyowners just to meet death claims arising in the future under normal statistical expectations. But there is more to consider.
- Question 20 of 30
20. Question
Which of the following about Expenses are incorrect?
CorrectExpenses: the net premium has to be subject to a loading (surcharge or additional sum) to take care of all expected and probable expenses. These will include all internal operating costs, commissions, tax and overheads to which any business is subject. With life insurance, there is also the possibility (however remote) of unusual mortality rates from some new disease or other disaster – and existing premiums cannot be increased later to deal with changed circumstances. Loading the net premium will include an amount to cover that kind of contingency. 1/12 Note: The loading added to the net premium produces the gross premium, which takes into account all three basic factors mentioned above.
IncorrectExpenses: the net premium has to be subject to a loading (surcharge or additional sum) to take care of all expected and probable expenses. These will include all internal operating costs, commissions, tax and overheads to which any business is subject. With life insurance, there is also the possibility (however remote) of unusual mortality rates from some new disease or other disaster – and existing premiums cannot be increased later to deal with changed circumstances. Loading the net premium will include an amount to cover that kind of contingency. 1/12 Note: The loading added to the net premium produces the gross premium, which takes into account all three basic factors mentioned above.
- Question 21 of 30
21. Question
Life insurance belongs to long term business, and this implies that the contract not only is very likely to last several years, but also it cannot be cancelled or amended by the insurer without the consent of the policyowner. Therefore, other factors which may arise from time to time can only affect premiums for new policies, such as:
I. Company objectives and marketing strategies
II. Public health
III. PAR or NON-PAR
IV. Economic changeCorrectAs mentioned, premiums for existing policies cannot be changed. Life insurance belongs to long term business, and this implies that the contract not only is very likely to last several years, but also it cannot be cancelled or amended by the insurer without the consent of the policyowner. Therefore, other factors which may arise from time to time can only affect premiums for new policies. Some of the influences which might have an effect on life premium rating are mentioned below:
(a) PAR or NON-PAR
(b) Competition
(c) Economic changes
(d) Public health
(e) Fiscal changes
(f) Company objectives and marketing strategiesIncorrectAs mentioned, premiums for existing policies cannot be changed. Life insurance belongs to long term business, and this implies that the contract not only is very likely to last several years, but also it cannot be cancelled or amended by the insurer without the consent of the policyowner. Therefore, other factors which may arise from time to time can only affect premiums for new policies. Some of the influences which might have an effect on life premium rating are mentioned below:
(a) PAR or NON-PAR
(b) Competition
(c) Economic changes
(d) Public health
(e) Fiscal changes
(f) Company objectives and marketing strategies - Question 22 of 30
22. Question
Which of the following about PAR or NON-PAR are incorrect?
CorrectPAR or NON-PAR: this is extremely important. One unique feature of life insurance is that a policy is either a “participating” (PAR) policy or a “non-participating” policy (NON-PAR). The owner of a participating policy is entitled to receive a varying share of (or to “participate” in) the divisible surplus, if any, of the insurer, normally on the policy anniversary dates. Such proceeds are termed policy dividends or dividends. Though no policy dividends are guaranteed, participating policies are subject to higher premium rates than equivalent Non-Participating policies. Note: 1 While U.S. insurers talk of par and non-par policies and dividends, U.K. insurers issue policies which are either WithProfit or Without-Profit, and declare bonuses. The concept is the same, although there are differences between the U.S and U.K. practices. Bonuses are usually reversionary (i.e. payable only when the policy benefit is payable), whereas dividends are payable upon annual declarations. Having said that, reversionary bonuses can be surrendered without terminating the policy (see 1.3.2b(c)(i) for surrender values). Suppose a whole life policy has earned an accumulated reversionary bonus of £5,000. The policyowner is entitled to an immediate payment out of such value, but only at a discount. Further suppose that according to the insurer’s calculation based on factors such as the current age of the life insured and the expected rates of interest, the future bonus value of £5,000 is equivalent to an immediate surrender value of £1,000. Then by surrendering, say, half of the accumulated bonus value, the policyowner will be paid £500 immediately. 2 Not all life insurance policies can be par or non-par. Term insurance plans (see 2.1.1) are normally not on a participating basis.
IncorrectPAR or NON-PAR: this is extremely important. One unique feature of life insurance is that a policy is either a “participating” (PAR) policy or a “non-participating” policy (NON-PAR). The owner of a participating policy is entitled to receive a varying share of (or to “participate” in) the divisible surplus, if any, of the insurer, normally on the policy anniversary dates. Such proceeds are termed policy dividends or dividends. Though no policy dividends are guaranteed, participating policies are subject to higher premium rates than equivalent Non-Participating policies. Note: 1 While U.S. insurers talk of par and non-par policies and dividends, U.K. insurers issue policies which are either WithProfit or Without-Profit, and declare bonuses. The concept is the same, although there are differences between the U.S and U.K. practices. Bonuses are usually reversionary (i.e. payable only when the policy benefit is payable), whereas dividends are payable upon annual declarations. Having said that, reversionary bonuses can be surrendered without terminating the policy (see 1.3.2b(c)(i) for surrender values). Suppose a whole life policy has earned an accumulated reversionary bonus of £5,000. The policyowner is entitled to an immediate payment out of such value, but only at a discount. Further suppose that according to the insurer’s calculation based on factors such as the current age of the life insured and the expected rates of interest, the future bonus value of £5,000 is equivalent to an immediate surrender value of £1,000. Then by surrendering, say, half of the accumulated bonus value, the policyowner will be paid £500 immediately. 2 Not all life insurance policies can be par or non-par. Term insurance plans (see 2.1.1) are normally not on a participating basis.
- Question 23 of 30
23. Question
Which of the following are pricing systems of life insurance?
I. natural premium system
II. life premium pricing system
III. level premium systemCorrectPricing Systems The natural and level premium systems for life insurance premium calculations might well be described as “ancient” and “modern” respectively, for reasons that will be clear shortly.
IncorrectPricing Systems The natural and level premium systems for life insurance premium calculations might well be described as “ancient” and “modern” respectively, for reasons that will be clear shortly.
- Question 24 of 30
24. Question
Which of the following about natural premium are incorrect?
CorrectThe natural premium system (or the natural premium pricing system) was used by some life insurers in the early days of the business. It was very logical, but it was doomed to failure because of its built-in features which virtually guaranteed that it could not work long-term in practice. Such features were: (a) Premiums: these were not to be constant throughout the policy term, but individually calculated each year so that they reflected the natural risk position (age, etc.) of the life insured at each policy anniversary.
Incorrect - Question 25 of 30
25. Question
What are the longer-term consequences of natural premium ?
I. increasing premiums with increasing age and, in later years, decreasing disposable resources or earning power of the policyowner, often presented real problems with continuation of insurance
II. the cash value is an acceptable collateral security for a loan. Borrowing money from the insurer using the cash value as security is now a right under modern policy terms.
III. the system was vulnerable to anti-selection, whereby the better risks those in good health and with real prospects of a long life – dropped out of the scheme as it became more expensive, and the bad risks would normally decide to continue, for obvious reasons.CorrectLonger-term consequences of natural premium: these, in hindsight, were very predictable and included: (i) increasing premiums with increasing age and, in later years, decreasing disposable resources or earning power of the policyowner, often presented real problems with continuation of insurance; (ii) the system was vulnerable to anti-selection (also known as selection against the insurer), whereby the better risks – 1/14 those in good health and with real prospects of a long life – dropped out of the scheme as it became more expensive, and the bad risks would normally decide to continue, for obvious reasons. This creates an imbalance of risks, or a failure to satisfy a criterion of the law of large numbers, i.e. the existence of a large, if not infinite, number of homogeneous exposure units in the pool.
IncorrectLonger-term consequences of natural premium: these, in hindsight, were very predictable and included: (i) increasing premiums with increasing age and, in later years, decreasing disposable resources or earning power of the policyowner, often presented real problems with continuation of insurance; (ii) the system was vulnerable to anti-selection (also known as selection against the insurer), whereby the better risks – 1/14 those in good health and with real prospects of a long life – dropped out of the scheme as it became more expensive, and the bad risks would normally decide to continue, for obvious reasons. This creates an imbalance of risks, or a failure to satisfy a criterion of the law of large numbers, i.e. the existence of a large, if not infinite, number of homogeneous exposure units in the pool.
- Question 26 of 30
26. Question
Which of the following about level premium system are incorrect?
CorrectLevel Premium (Pricing) System The level premium system (or the level premium pricing system) is now the norm and its features are described below: (a) Basic concept: by the judicious use of mortality tables and actuarial calculations, it was realised that it was possible to quote an annual premium that would remain level (unchanged) for the duration of the contract, based upon the age, sex and individual underwriting features of the life to be insured. This, of course, assumes that the death benefit level also remains unchanged. Compared with the cumbersome and unsatisfactory features of the natural premium system, the advantages and attractiveness of such a system are obvious. Therefore, it quickly superseded the old system. (b) Short-term consequences: clearly, the level premium system envisages a long-term contract, where an unchanging annual premium will effectively “average out” over the years. It implies that the annual premium is “too much” for the risk involved in early years, and may be “too little” for the risk involved in later years. Of course this is a simplification, but it is not inaccurate. From this concept, it may be seen that once the initial expenses and costs of setting up a policy have been absorbed, the early years’ “excess” premiums plus the interest earnings thereon start to create a fund or reserve against the future liability. In the usual practice of non-life insurance, the premium is calculated each year and at the end of the year the premium is considered fully earned by the insurer. The life policy, under the level premium system, soon begins to build up a cash value for the policyowner.
IncorrectLevel Premium (Pricing) System The level premium system (or the level premium pricing system) is now the norm and its features are described below: (a) Basic concept: by the judicious use of mortality tables and actuarial calculations, it was realised that it was possible to quote an annual premium that would remain level (unchanged) for the duration of the contract, based upon the age, sex and individual underwriting features of the life to be insured. This, of course, assumes that the death benefit level also remains unchanged. Compared with the cumbersome and unsatisfactory features of the natural premium system, the advantages and attractiveness of such a system are obvious. Therefore, it quickly superseded the old system. (b) Short-term consequences: clearly, the level premium system envisages a long-term contract, where an unchanging annual premium will effectively “average out” over the years. It implies that the annual premium is “too much” for the risk involved in early years, and may be “too little” for the risk involved in later years. Of course this is a simplification, but it is not inaccurate. From this concept, it may be seen that once the initial expenses and costs of setting up a policy have been absorbed, the early years’ “excess” premiums plus the interest earnings thereon start to create a fund or reserve against the future liability. In the usual practice of non-life insurance, the premium is calculated each year and at the end of the year the premium is considered fully earned by the insurer. The life policy, under the level premium system, soon begins to build up a cash value for the policyowner.
- Question 27 of 30
27. Question
which of the following points are the long term consequences of level premium system?
I.cash value
II.policy loan
III.nonforfeiture
IV.unpaid insuranceCorrectThese following points are the long term consequences of level premium system:
Cash value or surrender value
Policy loan
Nonforfeiture
Paidup insuranceIncorrectThese following points are the long term consequences of level premium system:
Cash value or surrender value
Policy loan
Nonforfeiture
Paidup insurance - Question 28 of 30
28. Question
Which of the following about surrender value or cash value are incorrect?
CorrectCash value and surrender value: When a policy has been in force long enough to “clear” the set-up costs, part of the premiums received – after the risk premium for the past period has been deducted – can be considered to be “not yet earned” by the insurer; it is referred to as a “cash value”. Therefore, when a policyowner cancels a policy that is carrying a cash value, there should be a sum of money payable to him, representing a refund of premiums “unearned” by the insurer. This sum is known as “surrender value”. Surrender value equals cash value minus surrender charge, a charge that is applicable when a policy is surrendered for its cash value or when a policy, under some plans, is adjusted to provide a lower amount of death benefit. Note: This is not true for Term Insurance (see 2.1.1), where the premium is geared only to the risk of death during a specified period of cover. Such policies have no cash value.
IncorrectCash value and surrender value: When a policy has been in force long enough to “clear” the set-up costs, part of the premiums received – after the risk premium for the past period has been deducted – can be considered to be “not yet earned” by the insurer; it is referred to as a “cash value”. Therefore, when a policyowner cancels a policy that is carrying a cash value, there should be a sum of money payable to him, representing a refund of premiums “unearned” by the insurer. This sum is known as “surrender value”. Surrender value equals cash value minus surrender charge, a charge that is applicable when a policy is surrendered for its cash value or when a policy, under some plans, is adjusted to provide a lower amount of death benefit. Note: This is not true for Term Insurance (see 2.1.1), where the premium is geared only to the risk of death during a specified period of cover. Such policies have no cash value.
- Question 29 of 30
29. Question
Which of the following are incorrect ?
CorrectPolicy loan: the cash value is an acceptable collateral security for a loan. Borrowing money from the insurer using the cash value as security is now a right under modern policy terms.
Nonforfeiture: without specific policy provisions to the contrary, a life insurance policy will lapse (i.e. discontinue) if renewal premiums are not paid when due. However, its cash value, if sufficient, may be used voluntarily by the policyowner or sometimes automatically under policy terms, to keep the insurance in forceIncorrectPolicy loan: the cash value is an acceptable collateral security for a loan. Borrowing money from the insurer using the cash value as security is now a right under modern policy terms.
Nonforfeiture: without specific policy provisions to the contrary, a life insurance policy will lapse (i.e. discontinue) if renewal premiums are not paid when due. However, its cash value, if sufficient, may be used voluntarily by the policyowner or sometimes automatically under policy terms, to keep the insurance in force - Question 30 of 30
30. Question
Which of the following about Expected perils and uninsured perils are incorrect?
CorrectExcepted (or Excluded) Perils: in non-life insurance, all policies carry some exclusions. If one of these operates with a claim, the insurer is not liable for the whole of or part of the loss, depending on the specifics of the exclusion. Life insurance policies seldom have exclusions (but see Note 1 below). (iii) Uninsured Perils: these are causes of loss which are neither included nor excluded, for example water damage with fire insurance. If property is damaged by water (e.g. by rain) with no other cause involved, the damage is not covered. But if the water damage is proximately caused by an insured peril (say fireman fighting a fire with water hoses), the water damage is covered. Such complexities are unlikely to arise with life insurance claims. Note: 1 Suicide is a life policy exclusion, and the principle of proximate cause will be an important tool to determine whether death arose from suicide or not. However, even here the principle does not have full impact, because suicide is only excluded for a limited time period (suicide exclusion period) (see 4.12). 2 We may conclude that the principles of insurance, especially those concerned with claims, have less application in life insurance than in non-life insurance.
IncorrectExcepted (or Excluded) Perils: in non-life insurance, all policies carry some exclusions. If one of these operates with a claim, the insurer is not liable for the whole of or part of the loss, depending on the specifics of the exclusion. Life insurance policies seldom have exclusions (but see Note 1 below). (iii) Uninsured Perils: these are causes of loss which are neither included nor excluded, for example water damage with fire insurance. If property is damaged by water (e.g. by rain) with no other cause involved, the damage is not covered. But if the water damage is proximately caused by an insured peril (say fireman fighting a fire with water hoses), the water damage is covered. Such complexities are unlikely to arise with life insurance claims. Note: 1 Suicide is a life policy exclusion, and the principle of proximate cause will be an important tool to determine whether death arose from suicide or not. However, even here the principle does not have full impact, because suicide is only excluded for a limited time period (suicide exclusion period) (see 4.12). 2 We may conclude that the principles of insurance, especially those concerned with claims, have less application in life insurance than in non-life insurance.