IIC C11 - Principles and Practice of Insurance

When apolicyholder(the insured) cancels a policy before its natural expiry date, insurers applyshort rate cancellation. Under short rate cancellation, the insurer refunds the unearned premiumminus a penalty. This penalty is applied because early cancellation disrupts expenses already incurred by the insurer, such as acquisition and administrative costs.

By contrast:

Pro rata cancellation (A)applies when theinsurercancels the policy — this provides the insured with thefullunearned premium refund, without penalties.

Half-term (B)is not a recognized cancellation method.

Partial-term (D)is also not an insurance cancellation method.

Thus, when the insured initiates cancellation, the correct method applied isshort rate.

Adirect lossis damage that resultsimmediately and directlyfrom the action of an insured peril. For example, fire burning a building, wind damaging a roof, or theft taking merchandise. The loss must be theproximate (dominant) causeand must flow directly from the peril named or covered in the policy.

Option A is incorrect because direct loss refers to a peril’s action, not to who caused it.

Option C describes extensions of coverage, not direct losses.

Option D describes anindirect (consequential) loss, such as business interruption resulting from a fire—not the physical damage itself.

Therefore, the correct definition of a direct loss isB: Damage to property by the direct action of an insured peril.

Liability insurance arises because individuals and businesses have legal obligations not to cause bodily injury or property damage to others. When someone is negligent, the law allows the injured party to seek compensation. These legal obligations can be substantial and financially devastating. Liability insurance provides protection by transferring the financial burden of compensating others to an insurer. It ensures that the insured can meet their legal responsibilities and that injured third parties receive compensation.

Option A is incorrect because liability insurance is not for protecting oneself from personal risk—it protects against obligations to others. Option C refers to social norms, which may influence behavior but do not impose enforceable financial duties. Option D refers to ethics, but ethical feelings alone do not create legal liability.

The key reason liability insurance exists is the legal requirement to compensate others when negligent, making B the correct answer.

In Canadian insurance law,statutory conditionsapply differently depending on the class of insurance:

Fire insurance policiescontainStatutory Conditionsunder provincial Insurance Acts.

Accident & sickness policiescontainStatutory Conditionsspecific to health and travel insurance.

Automobile insuranceincludesStatutory ConditionsorGeneral Conditions(depending on the province).

The table shown in your image lists headings:

A: Rights of examination,B: Action,C: Prohibited use by insured.

These correspond directly to statutory condition categories found infire insuranceandaccident & sickness insurance, not automobile.

The correct ordering is:

A = Fire,B = Accident & Sickness,C = Automobile.

This matches optionB.

Under Canadian privacy legislation (such as PIPEDA), personal information may only be used for the specific purpose for which it was originally collected unless the client provides informed consent for additional use. Insurance intermediaries must therefore obtain explicit permission from the client before using or disclosing their information for any new purpose, such as marketing, cross-selling, or sharing data with third-party providers.

Option B—simply notifying the client—is insufficient without consent. Option C is incorrect, as the ombudsperson deals with complaints, not privacy approvals. Option D is incorrect because privacy officers do not grant permissions; the law requires consent from the individual, not from government officials.

Since consent is central to privacy compliance in insurance operations, the intermediary must obtain permission from the client, making A the correct answer.

A cover holder is a business entity authorized by an insurer—most often within the Lloyd’s structure—to bind coverage, issue policies, collect premiums, and sometimes handle claims for specific lines of business. This authority is granted through a binding authority agreement, which outlines the scope of operations, underwriting limits, and compliance requirements. Cover holders extend the market reach of insurers while maintaining oversight through strict reporting and audit mechanisms.

A reinsurer assumes risk from insurers but does not issue retail policies or bind coverage for individual clients. A factory mutual is a specialized mutual insurer focusing on highly protected risks, not delegated binding authority. A syndicate mutual is not a recognized category in Canadian P&C operations. Since only a cover holder has formal delegated binding authority from an insurer, the correct answer is B.

To calculate premiums rated per $100 of insurance, the formula is:

Premium = (Amount of Insurance ÷ 100) × Rate

Step-by-step:

$500,000 ÷ 100 = 5,000 rating units

5,000 × $0.80 =$4,000

Thus, the annual premium for the building is$4,000, makingOption Cthe correct answer.

Option A is too low, while Options B and D do not match the rating calculation. Underwriters rely on these standardized rating methods to ensure consistent and adequate premium development.

The Facility Association is the Canadian automobile insurance mechanism designed to ensure that high-risk drivers, who cannot obtain insurance in the voluntary market, are still able to secure the legally required automobile insurance coverage. All auto insurers in participating provinces must be members, and losses and premiums in the pool are shared among them according to market share.

Option B, “Substandard Group,” is not an official Canadian mechanism. Option C does not refer to any recognized underwriting pool for high-risk auto insurance. Option D is not an actual insurance entity.

Only the Facility Association accurately represents the mandatory pooling arrangement for high-risk drivers.

AGuaranteed Replacement Cost (GRC)clause is a special provision in homeowners’ insurance that ensures the insurer will pay thefull cost to rebuild or repairthe dwellingeven if the loss exceeds the stated policy limit, provided all policy conditions are met (such as insuring to value and notifying the insurer of changes to the building).

This clause protects homeowners from unexpected increases in construction costs due to inflation, labour shortages, or material price spikes. The insurer guarantees complete reconstruction of the home, not merely up to policy limits.

Option A is not a recognized policy clause.

Option B (total replacement cost clause) is not the standard industry term.

Option C (pure restitution clause) does not exist in homeowners insurance terminology.

The only accurate clause that obligates the insurer to pay above policy limits is theGuaranteed Replacement Cost clause.

For a new insurer, cash flow and premium collection are critical. Liability claims often take years to develop, but expenses such as commissions, reinsurance, administration, and claim reserves must be funded immediately. If premiums are not collected promptly due to poor management of accounts receivable, the insurer may not have sufficient liquidity to meet obligations—even if it has written a large volume of business on paper.

Option B is irrelevant because insurers (unlike brokers) do not receive profit-sharing commissions.

Option C is not typically a cause of financial distress since endorsements generateadditionalpremium.

Option D—discounting premiums—could affect income but would not normally create severe financial difficulty unless combined with other poor practices.

The most likely reason for early-stage financial trouble is failure to collect premiums efficiently, making A correct.