Risk Management and Insurance
Risk Management and Insurance tests whether you can identify a pure risk, quantify the exposure, choose the correct treatment and select the contract wording that actually pays out.
The treatment framework
Identify the risk, measure frequency and severity, then avoid, reduce, retain, transfer or share. High-frequency, low-severity exposures are candidates for retention (deductibles); low-frequency, high-severity exposures should be transferred. Insurance is for catastrophic loss, not for predictable small costs.
Life insurance
- Needs approach: debts + income replacement + education + final expenses − existing resources (group life, savings, CPP survivor benefit).
- Term versus permanent (whole life; universal life with tax-sheltered cash value).
- Underwriting: contestability and suicide exclusions generally run two years; material misrepresentation voids coverage.
- Beneficiaries: revocable versus irrevocable (irrevocable designations protect proceeds from creditors and require consent to change). Never name a minor directly - the insurer may pay into a trust or annuity with limited control.
Disability insurance
Key definitions decide claims: own occupation versus any occupation, often switching to any occupation after 24 months. Also check waiting period, benefit period, occupation class, residual/partial benefits, and whether premiums are employer-paid (benefits then taxable). Replacement target is roughly 60–70% of after-tax income.
Property, liability and other covers
Replacement cost versus actual cash value, deductibles, coinsurance clauses, perils and exclusions, minimum third-party auto liability limits (varies by province), umbrella liability, critical illness (usually a 30-day survival requirement), and long-term care.
Worked example
Client earns $80,000; the family needs $40,000/year for 20 years. Mortgage $300,000, final expenses $15,000, group life $160,000, savings $50,000.
Needs = (40,000 × 20) + 300,000 + 15,000 − 160,000 − 50,000 = 800,000 + 300,000 + 15,000 − 210,000 = $905,000.
If the spouse has a pension and the mortgage is insured separately, those amounts must be netted out, which illustrates why the exam stresses reading the fact pattern rather than applying a formula blindly.
Traps
- Naming a minor as beneficiary.
- Assuming an "any occupation" definition is as generous as own occupation.
- Forgetting that employer-paid disability premiums make benefits taxable.
- Treating group coverage as portable after leaving the employer.
- Missing coinsurance or ACV clauses that reduce a property claim.