IIC C11 Principles and Practice of Insurance Exam Practice Test

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.

Risk mitigation refers to reducing the frequency or severity of potential losses. A first-time homeowner can mitigate risk by taking proactive measures such as installing smoke alarms, securing doors and windows, maintaining the property, or eliminating hazards. These actions directly decrease the homeowner’s volume of risk by reducing the probability of a loss or limiting its potential impact.

Option A—purchasing insurance—is not risk mitigation; it is risk transfer, where the financial consequences of loss are shifted to an insurer. Insurance does not reduce the likelihood of loss; it only provides compensation after loss.

Option B is the opposite of mitigation.

Option D is irrelevant to risk management.

Thus, the correct answer is C: Decrease their volume of risk.

Amanuscript wordingis a policy or endorsement crafted specifically for an individual client or an unusual risk exposure. It iscustom-writtenand negotiated between the insurer and the insured (or their broker). These wordings are used when standard forms do not adequately describe or protect a particular exposure, usually for large commercial clients, unique operations, or highly specialized risks.

Option A refers tostandardwordings, which are pre-written, commonly used forms approved by insurers or industry bodies.

Option B (chattel) refers to movable personal property, not policy wording.

Option C (treaty) refers to reinsurance agreements between insurers and reinsurers, not client-facing policy forms.

Therefore, the only option describing a custom-written policy wording isD: Manuscript.

In determining liability, the immediate (proximate) cause refers to the most direct, unbroken cause leading to the injury. In this sequence, the firecracker explodes in Celina’s hands immediately after she receives it from Sandra. Although Antonio initiated the chain of events and Brett contributed, their actions are more remote.

The last voluntary act that directly placed the dangerous object in the position where it caused harm was Sandra’s throw to Celina. Sandra’s action is therefore the immediate cause, even though earlier individuals may share legal responsibility in a broader causation analysis.

Option D is incorrect because Celina did not cause her own injury; she merely received the firecracker.

Option C includes Antonio and Brett, but neither was the final actor in the chain.

Therefore, the immediate cause of loss is B: Sandra.

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.

Abroker reportaccompanies an application submitted to an insurer. Its purpose is to give the underwriter helpful background information to properly assess the risk. The broker is expected to providepersonal knowledge of the clientthat may not be evident from the application itself, such as reputation, financial responsibility, prior behaviour, and risk-management practices. This information can significantly influence underwriting decisions.

Option A is incorrect—the insurer, not the broker, determines premium.

Option C may be included if relevant, but it is not the essential purpose of a broker report.

Option D (comparable accounts) is not standard practice; insurers rely on their own rating manuals and actuarial data.

Thus, the most appropriate and expected content in a broker report ispersonal knowledge of the client, makingBthe correct answer.

A cover note is a temporary document issued by a broker or agent to confirm that insurance coverage has been arranged and is in force, pending the issuance of the formal policy. It is typically used when immediate proof of insurance is required before the insurer can produce the finalized policy wording. Cover notes outline essential information such as the insured’s name, type of coverage, limits, and effective dates.

Option A is incorrect because a cover note is not a contract between insurer and broker. Option B describes an endorsement, not a cover note. Option C refers to internal file documentation but does not serve as official proof of insurance.

Thus, the correct definition is option D: a document issued to the insured confirming that temporary coverage is effective until the formal policy is issued.

A hazard is a condition that increases the likelihood or severity of a loss. Installing anti-slip flooring reduces the chance of slips and falls, thereby reducing a hazard. This is an example of loss prevention—altering physical conditions to make an environment safer.

Option B increases danger because high beams on a busy highway can blind other drivers. Option C significantly increases fire hazard because sprinkler systems provide automatic fire suppression. Option D exposes items to damage during transit, increasing rather than decreasing hazard.

Therefore, the only option that clearly reduces a hazard is A: installing anti-slip floor tile.

A general agent is an individual or business entity that receives broad authority from an insurer to operate on its behalf within a designated geographic territory. This authority typically includes the power to manage the insurer’s business, appoint sub-agents, oversee production, and settle certain types of claims within their delegated limits. In the traditional agency system in Canada, general agents act as intermediaries between the insurer and local agents, ensuring proper distribution of policies and adherence to underwriting rules.

This role is distinct from analysts, who do not hold managerial or appointment authority, and from wholesalers, whose function is typically limited to distributing insurance products to brokers rather than supervising an insurer’s operations. Operating agents may have administrative duties but do not hold the broad binding and claim-settlement authority that defines a general agent. Thus, the only option that correctly matches the described authority structure is General agent.

Bothstaff adjustersandindependent adjusterswork on behalf of the insurer when handling claims. A staff adjuster is an employee of the insurance company, while an independent adjuster is contracted by an insurer to investigate and adjust claims. Regardless of their employment relationship, both types of adjusters operate under the insurer’s authority, follow the insurer’s procedures, and act in the insurer’s interests when assessing damages, determining coverage, and recommending settlement amounts.

Option A is incorrect because both adjustersdoperform investigations. Option C is incorrect—adjusters are licensed in most provinces, not only Quebec and New Brunswick. Option D is incorrect because both staff and independent adjusters have specific limitations on their settlement authority, which depend on the insurer’s internal guidelines. Therefore, the similarity that applies universally isB.

Hazards are conditions thatincrease the likelihood or severity of a losscaused by an insured peril. Underwriters assess hazards (physical, moral, and morale hazards) to determine whether a risk is acceptable and at what price.

If hazards make an insured perilmore likely to occur, the underwriter willincrease the rateto reflect higher expected losses. This aligns exactly with option C.

Option A is close but incorrectly states “insured event,” not “insured peril,” and is less precise.

Option B misinterprets the law of large numbers; it applies to loss predictability, not hazard listing.

Option D misunderstands rating—rates are not calculated by multiplying premium by insured value.

Thus, the correct statement isC.

Insurers in Canada are heavily regulated in the way they invest their capital because they must remain financially strong to pay future claims. Government regulations—federal for federally regulated insurers and provincial for provincially regulated insurers—set out specific investment restrictions, including prohibiting certain high-risk or illiquid investments. These rules protect policyholders by ensuring insurers maintain solvency and liquidity.

Insurers must invest prudently in order to meet long-term obligations, and therefore regulators specify the classes of investments deemed too risky or unsuitable. This includes limits on speculative investments or holdings that could jeopardize stability.

Option A is incorrect because insurers arenotrequired to invest in non-liquid assets; in fact, liquidity is important.

Option B is incorrect; although some foreign investments may be allowed, the statement is not a broad principle of regulation.

Option C is incorrect because insurers face significant restrictions, not complete freedom.

Thus, D is the correct answer.

Chattelrefers tomovable personal property(as opposed to real property/land). Insurance policies that cover chattels protect items such as furniture, machinery, mobile homes, and other movable property.

Amobile homeis specifically recognized as chattel because it is transportable and not permanently affixed to land. Therefore, a mobile home qualifies for chattel insurance coverage.

Option A is atravel insurancerisk.

Option C is anevent prize indemnity risk, not related to chattel.

Option D isprofessional liability(errors & omissions), which covers negligence, not movable property.

Thus, the risk insurable under chattel coverage is amobile home, makingBthe correct choice.

New business clients often want to present themselves aslow-riskto secure better premium rates. As a result, they may be cautious about reporting small claims or may practice better loss prevention—at least initially. This can make new business perform better from a loss-ratio perspective.

However,renewal clients may become less cautiousover time or more willing to submit smaller claims once they are already insured. Additionally, insurers sometimes relax underwriting scrutiny on renewals compared to new applications, which can further widen performance differences.

Option A (automated renewals) does not inherently affect claims behaviour.

Option B is incorrect—renewal underwriting is typicallyless strict, not more.

Option C is false; reinsurance availability does not differ based on new vs. renewal status.

Thus, the factor most likely contributing to poorer renewal performance isD: New business clients limit claims to keep premiums low, improving their initial results relative to renewals.

If you haveQuestions 85 onward, feel free to send them!

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.

Thesubject of insuranceis the property, person, or legal liability exposure that is being insured. This is the central object of the policy—what the insurer agrees to indemnify or protect. For example, a house in a homeowner’s policy, a vehicle in an automobile policy, or a person’s life in a life insurance contract. Identifying the subject of insurance is essential because underwriting, policy wordings, rates, and coverage conditions all revolve around what is being insured.

Option B refers toperils, which are the causes of loss, not the insured item. Option C refers to the insurer itself and is unrelated to the definition. Option D refers to policy language but not the underlying exposure.

Thus, the correct meaning of the term isA: the thing being insured.

Apolicyis a legal contract issued by theinsurer, not the broker and not the policyholder. Therefore, the individuals who sign the policy are usually the insurer’s authorized signing officers.

These are typically:

The CEO or President, and

Another authorized senior officer, such as the Administrative Manager or Underwriting Officer.

In the table:

Cathy(CEO) is an authorized signer.

Alan(Administrative Manager) is also an authorized insurer representative.

The insured (Simone) doesnotsign the actual policy document; their signature is not required for the policy to be valid. The broker (Denis) also doesnotsign policies; he facilitates placement but is not a party to the contract.

Thus, the correct pair isAlan and Cathy.

When more than one insurer covers the same property under policies with identical terms, the loss is often shared according to the proportion of insurance each company provides. This is commonly referred to as contribution “pro rata by limits.”

First, determine the total amount of insurance:

Insurer X: $400,000

Insurer Y: $100,000

Total insurance: $500,000

Next, determine each insurer’s percentage of the total:

Insurer X: 400,000 ÷ 500,000 = 80%

Insurer Y: 100,000 ÷ 500,000 = 20%

The total loss is $100,000, so each insurer pays its proportion of the loss:

Insurer X: 80% × $100,000 = $80,000

Insurer Y: 20% × $100,000 = $20,000

There is no deductible to adjust these amounts. Thus, Insurer X pays $80,000 and Insurer Y pays $20,000, making Option C correct.

For a legally binding contract, there must beoffer and acceptance—a clear proposal and a clear, communicated acceptance. In this case, George attempts to treatsilenceas acceptance. According to contract law,silence cannot constitute acceptance, unless there is a prior agreement between the parties stating otherwise. Because his cousin has not actively communicated acceptance, the contract remains incomplete.

Option A is incorrect—consideration exists (money in exchange for books).

Option B is irrelevant—buying textbooks is legal.

Option C does not apply—George is 18 and has legal capacity in Alberta.

The missing element isacceptance, so the correct answer isD.

The Canadian property and casualty (P&C) insurance industry employs a range of specialized professionals who support the underwriting, claims, regulatory, and legal functions necessary for insurance operations. Lawyers are commonly employed directly by insurers to provide advice on policy interpretation, defend claims litigation, ensure regulatory compliance, draft contracts, and handle disputes. They play a crucial role in the claims process, particularly for liability claims and complex legal matters.

Mechanics, travel agents, and health professionals are not directly employed by the P&C insurance industry. Mechanics may work with insurers as third-party repair facilities, but they are not typically employees. Travel agents relate to travel services, not insurance employment. Health professionals may support life and health insurers or provide assessments for claims, but they are not ordinarily employed in theproperty and casualtysector. Therefore, the correct answer is A: Lawyer.

This question is identical to Question 25, so the correct answer and reasoning are the same. Whether an adjuster is a staff employee or an independent contractor, they are hiredto represent the insurerin the claims process. They are both compensated by the insurer—staff adjusters through salary and benefits, independent adjusters through fees or billing arrangements. Both must meet licensing requirements established by provincial regulatory bodies, conduct investigations, and report their findings to the insurer. They are also both subject to authority limits on claim settlement.

Thus, the only option that correctly reflects their similarity isB: both serve and are paid by insurers.

Insurance policies require the insured to report all accidents promptly, even when they appear minor. By settling privately and failing to notify the insurer, Mark violated a fundamental policy condition. This breach is significant because it prejudices the insurer’s rights: the insurer lost the opportunity to investigate, defend, or control settlement negotiations. Under the statutory conditions (especially for automobile insurance), failure to report may result in the forfeiture of the insured’s right to recovery.

Option A is incorrect because limitation periods vary and do not automatically cause a denial; moreover, the issue is the insured's breach, not limitation law. Option C is incorrect because this is a liability claim, not accident benefits. Option D is incorrect because the current policy does not automatically cover past unreported accidents, and coverage can be denied if the insured breached statutory reporting conditions.

Thus, the insurer will most likely deny coverage because Mark forfeited his rights by failing to report the loss, making B correct.

When two insurers cover the same property, theprinciple of contributionapplies. Each insurer pays a proportion of the loss based on its share of the total insurance in force. Here:

Total insurance = $300,000 + $100,000 = $400,000

Insurer A’s share = 300,000 / 400,000 =75%

Insurer B’s share = 100,000 / 400,000 =25%

Loss = $80,000

Insurer A pays 75% × 80,000 =$60,000

Insurer B pays 25% × 80,000 =$20,000

Thus,Cis correct.

Brokers act as agents of the insured, meaning they owe a professional duty to advise the insurer of any material change in risk. A material change is any alteration that significantly affects the underwriting assessment of the policy. If a broker fails to report such a change, the insurer is legally entitled to void coverage or deny a claim because it was not given full information to properly rate or accept the risk.

When a claim is denied due to the broker’s failure—not the insured’s intentional nondisclosure—the insured will typically seek compensation by suing the brokerage for negligence. The brokerage has a legal duty of care to ensure proper communication with insurers on behalf of the client.

Options A and B make no sense because the insurer will not voluntarily pay after a justified denial. Option C is unlikely, because the insurer can demonstrate that it never received notification of the change. The correct and realistic recourse is legal action against the brokerage, making D correct.

Prescription refers to the legally defined period during which an insured is permitted to initiate legal action to enforce a claim under the insurance contract. Once the prescriptive period expires, the insured loses the legal right to pursue the claim, even if the claim itself is otherwise valid. This protects insurers from indefinite liability and encourages timely reporting and settlement of claims.

A waiver is the voluntary relinquishment of a known right. A release is a document signed by the insured surrendering further claims, usually after settlement. A non-waiver agreement preserves the insurer’s right to investigate a claim without admitting liability. None of these terms relate to the legal time limit for bringing an action. Therefore, the correct term describing the time frame for commencing legal proceedings is prescription.

Asurety bondis a three-party contract in which the surety guarantees the performance of a contractor (principal) for the benefit of a third party (obligee). In construction, a developer may require a contractor to post aperformance bondensuring the project will be completed as agreed. This is the classic example of suretyship.

Option A is banking, not surety.

Option B is liability insurance, not a three-party guarantee.

Option D involves marine or cargo insurance, not a performance guarantee.

Thus,Ccorrectly describes a surety situation.

Abrokeris an independent insurance intermediary who represents theinsured, not the insurer, yet also interacts professionally with insurers to place coverage. Brokers typicallyown their client lists, have the freedom to place business with multiple insurers, and earn income throughcommissionsonce policies are sold or renewed. They are obligated to provide impartial advice and ensure clients receive suitable coverage.

Underwriters (option B) do not own client lists and do not earn commissions; they work for insurers evaluating risks. Exclusive agents (option C) representone insurer onlyand generally do not own their book of business. Independent adjusters (option D) investigate and adjust claims—they do not sell insurance nor hold client lists.

Orianna’s described attributes—ownership of clients, acting for both parties, and earning commissions—match precisely the role of abroker, makingAcorrect.

Pre-loss objectives in risk management are goals an organization aims to achievebeforeany loss occurs. These objectives focus on minimizing the frequency and severity of losses, ensuring preparedness, and maintaining organizational functionality.

Operational continuityis a key pre-loss objective because it emphasizes having systems, controls, and procedures in place to ensure that operations run smoothly—even when risk exposures are present. This includes safety programs, maintenance schedules, compliance measures, and contingency planning. Operational continuity ensures the business can withstand or avoid disruptions.

Option A (external obligations) is vague and not formally defined as a risk management objective.

Option B (sustained growth) and D (business development) arebusiness goals, not pre-loss risk management objectives.

Thus, the correct answer isC: Operational continuity.

In insurance terminology, aspeculative riskis a situation where there is a possibility of either financial gain or financial loss, depending on how events unfold. This is what makes it different from apure risk, where the only possible outcomes are loss or no loss (but never a profit). Examples of speculative risk include investing in the stock market, starting a business, or buying foreign currency. In each of these situations, you may end up with a profit, break even, or suffer a loss.

Because speculative risks involve the potential for profit, they are generally not insurable. Insurance is designed to respond to pure risks, such as the risk of fire damaging a building, or a car accident causing injury or property damage. In those cases, there is no opportunity for financial gain from the event itself—only the chance of economic loss or no loss at all.

Therefore, the defining characteristic of speculative risk, and the correct answer to this question, is the possibility of either gain or loss, which is captured by option D.

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.