Department of Management Sciences

Semester 7
Course: Insurance Finance
Objective type Questions

Q1. Tick True or False to the given statements.

1. Money economies are more ancient form than the natural economies. F
2. The Babylonians developed a system which was recorded in the famous Code of
Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. T
3. The inhabitants of Rome invented the concept of the “general average”. F
4. Toward the end of the 17th century, London's growing importance as a centre for trade
increased demand for house insurance. F
5. Insurance can be traced to the Great Fire of London, which in 1966 devoured more than
13,000 houses. F
6. The first insurance company in the United States underwrote fire insurance and was formed
in Royal Exchange, South Carolina. F
7. Specific kinds of risk that may give rise to claims are known as perils. T
8. Auto insurance protects the policyholder against financial loss in the event of an incident
involving a vehicle they own, such as in a traffic collision. T
9. Workers' compensation allows business owners to cover the overhead expenses of their
business while they are unable to work. F
10. Political risk insurance is a form of casualty insurance that covers the policyholder against
losses arising from the criminal acts of third parties. F
11. The warranty of merchantability is a type of implied warranty. T

12. In Massachusetts consumer protection law, it is legal to disclaim this warranty on household
goods sold to consumers. F

13. A lifetime warranty is usually a guarantee on the lifetime of the product on the market. T

14. If a product has been discontinued and is no longer available, the warranty may last an
unlimited period longer. F

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15. Second-hand products include products that have previously been used by an end
user/consumer. T

16. Breach of warranty take place when a promise is made. F

17. If the goods were defective at the time of sale, and the relevant statute of limitations has not
expired, then existence or duration of any "extended warranty" is primary. F

18. It could be fair to attempt to avoid liability for breach of a primary warranty by claiming
expiration of the irrelevant extended warranty. F

19. The warranty of fitness for a particular purpose is expressed when a buyer relies upon the
seller to select the goods to fit a specific request. F

20. This implied warranty can also be expressly disclaimed by name, thereby shifting the risk of
unfitness back to the buyer. T

21. General insurance companies can be further divided into three sub categories. F

22. General or casualty insurance companies sell life insurance, annuities and pensions products.
F

23. Excess line insurance companies typically insure risks not covered by the standard lines
market. T

24. Mutual companies are owned by the stockholders (who may or may not own policies). F

25. Captives are not considered as important component of the risk management and risk
financing strategy of parent company. F

26. Third party administrators are companies that perform underwriting and sometimes claims
handling services for insurance companies. T

27. According to islamic point of view, Insurance policies that earn interest are not generally
considered to be a form of riba. F

28. Insurance may also be purchased through an agent because agents generally can offer a broad
range of selection compared to an insurance broker. F

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29. Some insurance products or practices are useful primarily because of legal benefits, such as
reducing taxes, as opposed to providing protection against risks of adverse events. T

30. Liability insurance providers do not provide coverage for liability arising from intentional
torts committed by or at the direction of the insured. T

31. Errors and omissions insurance protect the insured from giving away a large prize at a
specific event. (false)

32. Credit insurance repays some or all of a loan when certain circumstances arise to the
borrower. (True)

33. Liability insurance is a very broad superset that covers legal claims against the insured.
(True)

34. Collateral protection insurance covers the loss of income, and the expenses incurred, after a
covered peril interrupts normal business operations. (False)

35. Expatriate insurance provides individuals and organizations operating outside of their home
country. (True)

36. Protected self-insurance is aimed at providing protection on the products people purchase.
(false)

37. Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of
one's own money. (True)

38. Expatriate insurance provides protection against catastrophic or unpredictable losses.

(False)

39. Social insurance is a type of insurance purchased by insurance companies or self-insured

employers to protect against unexpected losses. (false)

40. The protection offered by a liability insurance policy is twofold. (True)

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 Q2. Give Short Answers to the following Questions:

1. Explain the types of economies in human societies?

Ans: There are two types of economies in human societies: money economies (with markets,
money, financial instruments and so on) and non-money or natural economies (using barter and
trade without a centralized and/or standardized set of monetary instruments). The second type is
a more ancient form than the first.

2. Briefly describe auto insurance?

Ans: Auto insurance protects the policyholder against financial loss in the event of an incident
involving a vehicle they own, such as in a traffic collision. It is a contract between you and
insurance company. You agree to pay the premium and the insurance company agrees to pay you
the losses as defined in the policy. Coverage typically includes:
1. Property coverage, for damage to or theft of the car;
2. Liability coverage, for the legal responsibility to others for bodily injury or property
damage;
3. Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost
wages and funeral expenses.

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3. What is casualty?
Ans: Casualty insurance insures against accidents, not necessarily tied to any specific property.
 Crime insurance is a form of casualty insurance that covers the policyholder against
losses arising from the criminal acts of third parties. For example, a company can obtain
crime insurance to cover losses arising from theft or embezzlement.
 Political risk insurance is a form of casualty insurance that can be taken out by
businesses with operations in countries in which there is a risk that revolution or
other political conditions could result in a loss.

4. Differentiate between accident, sickness and unemployment insurance?

Ans: Disability insurance policies provide financial support in the event of the policyholder
becoming unable to work because of disabling illness or injury. It provides monthly support to
help pay such obligations as mortgage loans and credit cards.
 Disability overhead insurance allows business owners to cover the overhead expenses
of their business while they are unable to work.
 Total permanent disability insurance provides benefits when a person is permanently
disabled and can no longer work in their profession, often taken as an adjunct to life
insurance.
 Workers' compensation insurance replaces all or part of a worker's wages lost and
accompanying medical expenses incurred because of a job-related injury.

5. Define life insurance?

Ans: Life insurance provides a monetary benefit to a descendant's family or other designated
beneficiary, and may specifically provide for income to an insured person's family, burial,
funeral and other final expenses. Life insurance policies often allow the option of having the
proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.

6. What is express warranty?

Ans. Express warranty is a guarantee from the seller of a product that specifies the extent to
which the quality or performance of the product is assured and states the conditions under which
the product can be returned, replaced, or repaired. It is often given in the form of a specific,
written "Warranty" document.

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7. Explain briefly the implied warranty?
Ans. An implied warranty is one that arises from the nature of the transaction, and the inherent
understanding by the buyer, rather than from the express representations of the seller.

8. What is lifetime warranty?

Ans. A lifetime warranty is usually a guarantee on the lifetime of the product on the market
rather than the lifetime of the consumer. If a product has been discontinued and is no longer
available, the warranty may last a limited period longer.

9. Explain second-hand product warranty briefly?

Ans. Second-hand products include products that have previously been used by an end
user/consumer. Users change their products even if they are still in good condition. Some
products such as computers and mobile phones have a short lifetime and technologies of these
products are released to the market every day. As a result, the sale of new products is often tied
to a trade-in, resulting in a market for second-hand products.

10. What is breach of warranty?

Ans. A warranty is violated when the promise is broken; when goods are not as should be
expected, at the time the sale occurs, whether or not the defect is apparent. The seller should
honor the warranty by making a timely refund or a replacement.
11. What is difference between property insurance and liability insurance?

Ans. Property insurance provides protection against risks to property, such as fire, theft or
weather damage. This may include specialized forms of insurance such as fire insurance, flood
insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance
whereas Liability insurance is a very broad superset that covers legal claims against the insured.

12. What is home insurance?

Ans. Home insurance, also commonly called hazard insurance, or homeowners insurance (often
abbreviated in the real estate industry as HOI), is the type of property insurance that covers
private homes, as outlined above.

13. Write down any three types of property insurance?

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Ans. 1) Boiler insurance (also known as boiler and machinery insurance, or equipment
breakdown insurance) insures against accidental physical damage to boilers, equipment or
machinery.

2) Landlord insurance covers residential and commercial properties which are rented to
others. Most homeowners' insurance covers only owner-occupied homes.

3) Crop insurance may be purchased by farmers to reduce or manage various risks

associated with growing crops. Such risks include crop loss or damage caused by weather,
hail, drought, frost damage, insects, or disease.

14. What do you know about Retrospectively-rated insurance?

Ans. Retrospectively-rated insurance is a method of establishing a premium on large commercial

accounts. The final premium is based on the insured's actual loss experience during the policy
term, sometimes subject to a minimum and maximum premium, with the final premium
determined by a formula. Under this plan, the current year's premium is based partially (or
wholly) on the current year's losses, although the premium adjustments may take months or years
beyond the current year's expiration date. The rating formula is guaranteed in the insurance
contract.

15. What is protected self insurance?

Ans. Protected self-insurance is an alternative risk financing mechanism in which an

organization retains the mathematically calculated cost of risk within the organization and
transfers the catastrophic risk with specific and aggregate limits to an insurer so the maximum
total cost of the program is known. A properly designed and underwritten Protected Self-
Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk
management information.

16. In how many types insurance companies can be classified, define them briefly?
Ans: insurance companies can be classifies into two groups:

1) Life insurance companies:

which sell life insurance, annuities and pension products.

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 2) Non life, general, or property/casualty insurance companies:

Which sell type of insurance, other than life insurance.

17. What is the main reason for distinction between two type of insurance companies?

Ans. The main reason for the distinction between the two types of company is that life, annuity,
pension business is very long term in nature. Coverage for life insurance can cover risks over
many decades. By contrast, non life insurance covers usually a shorter period of time, such as
one year.

18. How captive insurance companies can be defined?

Ans: captive insurance companies may be defined as limited-purpose insurance companies

esteblishedwith the specific objective of financing risks emanating from their parent group or
groups and in some cases it also includes some of the risks of parent company’s customers.

19. What is the working of insurance consultants & is there any difference between
insurance consultant and insurance broker?

Ans. Insurance consultants are the type of insurance companies. Like a mortgage broker, these
companies are paid fee by the cuctomer to shop around for the best insurance policy amongst
companies.

Working of insurance broker is very similar to insurance companies, however, with insurance
brokers, the fee is usually paid in the form of commision from the insurer that is selected rsther
than directly from the client.

20. Define “reinsurance companies”?

Ans. Rreinsurance companies are the type of insurance companies that sell policies to other
insurance companies , allowing them to reduce risks and protect them from very large losses.

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Q3. Multiple Choice Questions:

1. Before insurance ___________ existed in England, in which people donated amounts of

money to a general sum that could be used for emergencies.
a) Friendly Societies
b) Healthy Societies
c) Money Societies
d) Natural Societies
2. Separate insurance contracts were invented in _________ in the 14th century, as were
insurance pools backed by pledges of landed estates.
a) Rhodes
b) Genoa
c) Rome
d) Middle East

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3. Toward the end of the 17th century, London's growing importance as a centre for trade
increased demand for ____________.
a) Life Insurance
b) Health Insurance
c) Fire Insurance
d) Marine Insurance
4. The Great Fire of London, in 1666 devoured more than __________ houses.
a) 5000
b) 10,000
c) 13,000
d) 8000
5. Which of the following is the England's first fire insurance company established in 1681?
a) Insurance Office for Houses
b) Friendly Societies
c) Federal Regulatory system
d) Charleston Company

6. OFC stands for ___________?

a) Optical Fiber Cable
b) Optional Federal Community
c) Optional Federal Charter
d) Operational federal council
7. Crime insurance is a form of ___________that covers the policyholder against losses arising
from the criminal acts of third parties.
a) Casualty insurance
b) Life insurance
c) Political risk insurance
d) Accident Insurance
8. _____________allows business owners to cover the overhead expenses of their business
while they are unable to work.
a) Disability overhead insurance
b) Total permanent disability insurance
c) Workers' compensation

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 d) Life Insurance
9) HH When a promise is broken i.e. the product is defective or not as should be expected by a
reasonable buyer it is known as ----------.

a) Warranty

b) Implied warranty

c) Breach of warranty

d) Breach of contract

10) In real estate transaction, a --------- is a promise that buyer’s title to a parcel of land will be
defended.

a) Breach of warranty

b) Warranty deed

c) Partnership deed

d) Express warranty

11) A warranty is an ------- by one party to the other party that certain facts or conditions are true
or will happen.

a) Insurance

b) Assurance

c) Guarantee

d) Warranty deed

12) Sellers are allowed to assert statement of opinion of value, known as --------.

a) Puffery

b) Bargaining

c) Sales

d) Supply

13) Misuse of a famous ------- may also create an express warranty.

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 a) Brand

b) Product

c) Trademark

d) patent

14) The warranty of merchantability is a type of -------- warranty.

a) Express

b) Implied

c) Lifetime

d) Second hand

15) Express warranty is given in the form of a specific ------- warranty document.

a) Oral

b) Written

c) Verbal

d) Reading

16) “This hunting knife will never need to be sharpened” is an------- warranty.

a) Express

b) Implied

c) Breach of

d) 2nd hand

17) In ---------- seller is allowed to assert statement of opinion.

a) United states

b) United kingdom

c) Canada

d) Pakistan

18) A lifetime warranty is usually a guarantee on the lifetime of the---------.

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 a) Consumer

b) Product

c) Contract

d) Seller

19) ……….. insures against hull, spares, deductibles, hull wear and liability risks.
a) Driving school insurance
b) Boiler insurance
c) Aviation insurance
d) Builder’s insurance
20) ………….. insurance is also known equipment breakdown insurance.
a) Aviation
b) Fidelity
c) Boiler
d) Marine
21) Home insurance, also commonly called
a) hazard insurance
b) Aviation insurance
c) natural disaster insurance
d) Builder's risk insurance
22) ……………..insurance is a method of establishing a premium on large commercial accounts.
a) Protected self-insurance
b) Formal self insurance
c) Social insurance
d) Retrospectively-rated insurance
23) Mortgage insurance is a form of
a) credit insurance
b) Locked funds insurance
c) Defense Base Act
d) Surety bond
24) Builder's risk insurance is typically written on an ………..basis covering damage arising
from any cause
a) Some risk

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 b) All risk
c) Many risk
d) No risk
25) Most ordinary home insurance policies ………….earthquake damage
a) do not cover
b) always cover
c) some times covers
d) never cover
26) It usually insures a business for losses caused by the dishonest acts of its employees.
a) indemnity insurance
b) liability insurance
c) Errors and omissions insurance
d) Fidelity bond
27) Many marine insurance underwriters will include ……………..coverage in policies
a) time element
b) location element
c) value element
d) currency element
28) The protection offered by a liability insurance policy is
a) Twofold
b) Threefold
c) Fourfold
d) fivefold
29. Payment to an insurance company for the service is known as _____
a) Price
b) Premium
c) Rent
d) Installation charges
30. Loss ratio is calculated by dividing the amount of losses by the amount of _____
a) commision ratio
b) expense ratio
c) earned premium
d) loss ratio

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31. Combined ratio is the comination of loss ratio+ commision ratio+ _____
a) expense ratio
b) profit ratio
c) premium ratio
d) installment ratio
32. Global insurance premiums grew by ____ in 2008 to reach $4.3 trillion.
a) 3.2%
b) 4.4%
c) 3.75%
d) 3.4%
33. Insurance companies are generally classified as either mutual or____ companies.
a) Stock
b) Demutualized
c) Hybrid
d) Reciprocal

34. _______ Companies may be defined as limited-purpose insurance companies established

with the specific objective of financing risks emanating from their parent group or groups.
a) Reinsurance
b) Captive insurance
c) Excess line insurance
d) Casualty insurance

35. Non-life insurance cover usually covers a _____ period of time.

a) Longer
b) 2 year
c) 5 year
d) Shorter

36. Excess line insurance companies are also known as _____

a) Excess line insurance
b) Excess and Surplus
c) Casualty insurance

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 d) Excessive insurance

37. Which one of the following points doesn’t suuport theincreasing importance of captives in
risk management?
a) heavy and increasing premium costs in almost every line of coverage;
b) difficulties in insuring certain types of fortuitous risk;
c) differential coverage standards in various parts of the world;
d) sufficient credit for deductibles and/or loss control efforts.

38. With premium income of $1,753bn, _____ was the most important region for insurance
companies in 2008.
a) North america
b) Asia
c) Japan
d) Europe

Long questions:
1. Explain the characteristics of risk which can be insured?
2. Describe briefly insurance financing vehicles?
3. Write a comprehensive note on insurance companies?
4. Differentiate between express warranty, implied warranty and 2nd hand warranty?
5. What are the types of insurance? Discuss any two types of insurance in detail?
6. Discuss briefly liability insurance?
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