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CIIG Diploma practice questions

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Question 1Insurance Principles and Risk

Under the principle of indemnity, what is the fundamental purpose of a property insurance payment following a loss?

  1. To provide a profit that rewards the insured for having purchased cover
  2. To place the insured back in the same financial position as immediately before the loss Correct answer.
  3. To compensate the insured for emotional distress caused by the event
  4. To pay the full sum insured regardless of the actual value of the property

Explanation

Indemnity aims to restore the insured financially to the position held before the loss, no better and no worse. It prevents the insured from profiting from insurance and underpins concepts such as market value settlement and average. Payments are therefore limited by the actual loss and the sum insured.

Question 2Insurance Principles and Risk

A proposal form asks the applicant whether any insurer has ever declined or cancelled their cover. Why is this question significant in risk assessment?

  1. It identifies moral hazard that may not appear in past loss records Correct answer.
  2. It reveals information about the applicant's claims history only
  3. It confirms that the applicant has read the policy wording
  4. It determines the premium rate applicable to the property

Explanation

Declinature and cancellation questions probe moral hazard, which concerns the honesty and conduct of the proposer rather than the physical risk alone. A poor record of this kind may indicate an unacceptable attitude to risk even where claims are few. Insurers may decline, impose terms, or seek further information.

Question 3Insurance Principles and Risk

Which term describes the situation where the insured deliberately causes a loss in order to claim under the policy?

  1. Physical hazard
  2. Speculative risk
  3. Moral hazard Correct answer.
  4. Morale hazard

Explanation

Moral hazard arises from dishonest or fraudulent conduct, such as deliberately causing or exaggerating a loss to obtain a payout. It is distinguished from morale hazard, which is carelessness arising from having insurance. Insurers counter moral hazard through conditions, warranties, and claims investigation.

Question 4Insurance Principles and Risk

An insurer applies average to a fire claim. The property is insured for 80,000 when its full value at the time of loss is 100,000, and the loss is 20,000. What amount is payable, assuming no other deductions?

  1. 18,000
  2. 16,000 Correct answer.
  3. 20,000
  4. 10,000

Explanation

Average applies the proportion of sum insured to value: 80,000 divided by 100,000 equals 0.8. Applying 0.8 to the 20,000 loss produces 16,000. This reflects the principle of indemnity where the insured is underinsured.

Question 5Insurance Principles and Risk

In risk management terminology, what distinguishes a pure risk from a speculative risk?

  1. Pure risk is always uninsurable, while speculative risk is always insurable
  2. Pure risk applies only to property, while speculative risk applies only to liability
  3. Pure risk is measured in money, while speculative risk is measured in time
  4. Pure risk offers only the chance of loss, while speculative risk offers the chance of gain or loss Correct answer.

Explanation

Pure risks, such as fire or theft, involve only the possibility of loss or no loss and are the traditional subject of insurance. Speculative risks, such as trading or investment, carry the possibility of gain as well as loss. Insurers generally avoid speculative risk because it is voluntarily undertaken for profit.

Question 6Insurance Principles and Risk

Which of the following best describes the role of a warranty in an insurance contract?

  1. A discount applied to the premium for good claims experience
  2. A sum payable by the insurer in the event of total loss
  3. A promise by the insured that a particular state of affairs exists or will be maintained Correct answer.
  4. A statement of opinion that need not be strictly true

Explanation

A warranty is a promissory term requiring the insured to ensure that something is or is not done, or that a condition is fulfilled. Breach can entitle the insurer to repudiate the claim, subject to the applicable law's treatment of warranties. This contrasts with a representation, which is a statement made before the contract.

Question 7Insurance Principles and Risk

A homeowner leaves a pan cooking unattended, causing a kitchen fire. Which classification best fits the human element involved?

  1. Legal hazard
  2. Physical hazard
  3. Morale hazard Correct answer.
  4. Moral hazard

Explanation

Morale hazard is carelessness or indifference to loss, often because insurance exists. Leaving cooking unattended reflects a lack of care rather than deliberate wrongdoing. Insurers may address this through policy conditions, excesses, and risk-improvement advice.

Question 8Insurance Principles and Risk

What is the primary function of the premium in an insurance transaction?

  1. To guarantee that the insurer will never decline a claim
  2. To fund claim payments, expenses, and the insurer's required capital margin Correct answer.
  3. To represent the market value of the insured property
  4. To serve as a penalty for previous claims

Explanation

The premium is the consideration paid for cover and must fund expected claims, operating expenses, and an adequate margin for solvency and profit. It is calculated using rating factors and actuarial assumptions. It does not guarantee claim payment, which depends on the policy terms and the circumstances of the loss.

Question 9Insurance Principles and Risk

Which of the following is an example of a physical hazard in a commercial property risk?

  1. The owner's attitude towards fire precautions
  2. An accumulation of flammable packing materials in a warehouse Correct answer.
  3. A change in fire safety legislation
  4. The financial stability of the business

Explanation

Physical hazards are tangible characteristics of the risk that increase the likelihood or severity of loss, such as combustible storage or poor wiring. They can be surveyed and often improved. Financial stability, attitude, and legislation are not physical features of the property.

Question 10Insurance Principles and Risk

An insured holds two fire policies covering the same property and the same interest, and a loss occurs. What is the general consequence under the principle of indemnity?

  1. The insured must forfeit both claims because of double insurance
  2. The insured may choose one policy and the other is automatically void
  3. The insured may recover the full loss under each policy and retain the total
  4. The insured may recover only the actual loss, with the insurers sharing the payment Correct answer.

Explanation

Double insurance does not entitle the insured to recover more than the actual loss, because that would breach indemnity. The insurers contribute to the loss, often under a rateable proportion or contribution clause. The insured recovers the loss once, not twice.

Question 11Insurance Principles and Risk

What does the term 'subrogation' entitle an insurer to do after paying a claim?

  1. Step into the insured's legal rights to recover the loss from a responsible third party Correct answer.
  2. Increase the premium at the next renewal without notice
  3. Cancel the policy retrospectively from inception
  4. Sell the damaged property to recover its costs

Explanation

Subrogation allows the insurer, having indemnified the insured, to pursue the insured's rights of recovery against a third party who caused the loss. It supports indemnity by preventing the insured from recovering twice and by placing the burden on the party at fault. It does not give the insurer rights to vary the premium or cancel retrospectively.

Question 12Insurance Principles and Risk

Which statement best explains why insurable interest is required at the time of loss for property insurance?

  1. It ensures the insured will suffer financial loss if the insured event occurs Correct answer.
  2. It guarantees the insurer can recover from a third party
  3. It proves the insured owns the property outright
  4. It confirms the insured has paid the premium in full

Explanation

Insurable interest means the insured has a financial relationship with the subject matter such that a loss would cause them pecuniary disadvantage. Requiring it supports indemnity and helps prevent insurance being used as a wagering contract. A mortgagee, for example, has an insurable interest without owning the property outright.

Question 13Insurance Principles and Risk

A policy contains a condition requiring the insured to give notice of any loss within a specified period. What is the usual purpose of such a condition?

  1. To transfer liability for the loss to the insured
  2. To fix the premium for the following year
  3. To allow the insurer to investigate promptly and protect its position Correct answer.
  4. To limit the policy to a single claim per year

Explanation

Claims notification conditions enable the insurer to investigate the circumstances while evidence is fresh, mitigate further loss, and preserve recovery rights. Prompt notice also allows reserves to be set and fraud to be detected. The condition does not itself transfer liability for the loss to the insured.

Question 14Insurance Principles and Risk

Which of the following best describes the concept of 'utmost good faith' in insurance?

  1. The insured must insure for the full market value
  2. The broker must guarantee the solvency of the insurer
  3. Both parties must disclose material facts and avoid misleading the other Correct answer.
  4. The insurer must always pay claims without investigation

Explanation

Utmost good faith requires each party to disclose material information and refrain from misrepresentation, reflecting the information imbalance between insurer and applicant. Material facts are those that would influence a prudent insurer's decision or terms. The duty operates alongside, but is distinct from, the principle of indemnity.

Question 15Insurance Principles and Risk

An insured fails to disclose that a factory unit has been used to store fireworks. The insurer would have declined the risk had it known. What is the likely position?

  1. The insurer may only increase the premium retrospectively
  2. The insurer may avoid the policy for non-disclosure of a material fact Correct answer.
  3. The insurer must pay the claim because the policy was issued
  4. The insurer must pay but may cancel at the next renewal

Explanation

Non-disclosure of a material fact that would have influenced the insurer's decision can entitle the insurer to avoid the contract, subject to the applicable legal regime. The fact is clearly material because it affects the risk of fire and explosion. Remedies may vary by jurisdiction, but avoidance is the classic consequence.

Question 16Insurance Principles and Risk

What is the principal difference between a peril and a hazard?

  1. A peril is a physical feature, while a hazard is a legal rule
  2. A peril is always man-made, while a hazard is always natural
  3. A peril is uninsurable, while a hazard is always insurable
  4. A peril is the cause of loss, while a hazard increases the likelihood or severity of that loss Correct answer.

Explanation

A peril is the event that causes loss, such as fire, flood, or theft. A hazard is a condition or circumstance that increases the chance of a peril occurring or worsens its consequences. For example, faulty wiring is a hazard that increases the peril of fire.

Question 17Insurance Principles and Risk

An insurer wishes to reduce the problem of anti-selection. Which measure is most directly aimed at this?

  1. Offering the same premium to every applicant
  2. Removing all policy exclusions
  3. Paying all claims promptly without enquiry
  4. Gathering detailed proposal information and applying appropriate rating factors Correct answer.

Explanation

Anti-selection, or adverse selection, occurs when those most likely to claim are most likely to seek insurance. Detailed underwriting information and risk-based rating allow the insurer to price and select risks more accurately. Uniform pricing or removing exclusions would tend to worsen the problem.

Question 18Insurance Principles and Risk

Which of the following is the best example of a liability risk?

  1. Injury to a member of the public caused by the insured's defective premises Correct answer.
  2. Loss of the insured's profits following a machinery breakdown
  3. Theft of the insured's office equipment
  4. Damage to the insured's own stock caused by fire

Explanation

Liability risk concerns the insured's legal obligation to compensate others for injury or damage. Injury to a visitor caused by unsafe premises is a classic public liability exposure. The other options concern damage to the insured's own property or consequential loss.

Question 19Insurance Principles and Risk

A business decides to retain a small, frequent loss exposure and insure only the severe, infrequent exposures. Which risk management technique does the retention represent?

  1. Risk reduction
  2. Risk avoidance
  3. Risk retention Correct answer.
  4. Risk transfer

Explanation

Retention means accepting the financial consequences of a risk rather than transferring them. It is often appropriate for small, predictable losses where insurance would be uneconomic. Transfer would involve insurance or contractual shifting, while avoidance would mean not undertaking the activity at all.

Question 20Insurance Principles and Risk

What does the term 'proximate cause' refer to in insurance claims?

  1. The cause chosen by the insured when making a claim
  2. The most expensive element of the loss
  3. The last event before the loss is discovered
  4. The dominant, effective cause of a loss in an unbroken chain of events Correct answer.

Explanation

Proximate cause is the effective or dominant cause that sets in motion an unbroken sequence leading to loss. It matters where several causes combine and the policy treats them differently. The insured's preference or the cost of components does not determine proximate cause.

Question 21Insurance Principles and Risk

A policy excludes loss caused by war but covers fire. A fire is started by bombing during a declared war. How is the claim likely to be treated?

  1. The fire claim is payable because fire is a covered peril
  2. The claim is payable in half because two perils are involved
  3. The claim is likely excluded because the proximate cause is war Correct answer.
  4. The claim is payable because the bombing was not the insured's fault

Explanation

Where an excluded peril is the proximate cause of the loss, the exclusion generally applies even if a covered peril contributed. The bombing is the effective cause, and the fire is part of the chain set in motion by war. Fault of the insured and splitting the claim are not relevant considerations.

Question 22Insurance Principles and Risk

Why is a deductible or excess commonly applied to a property policy?

  1. To increase the sum insured automatically
  2. To eliminate small claims and give the insured a share of each loss Correct answer.
  3. To provide cover for wear and tear
  4. To convert the policy into a valued policy

Explanation

An excess reduces the administrative burden of small claims and keeps the insured financially interested in loss prevention. It also lowers the premium because the insurer bears less of each loss. It does not change the basis of valuation or extend cover to excluded perils.

Question 23Insurance Principles and Risk

In a valued policy, how is the amount payable for a total loss of the insured property determined?

  1. By the average condition applied to the sum insured
  2. By reference to the market value at the date of loss
  3. By the original purchase price of the property
  4. By the agreed value stated in the policy, subject to its terms Correct answer.

Explanation

A valued policy fixes the value of the subject matter in advance, and that agreed value is used to settle a total loss, subject to policy terms. This avoids disputes over market value at the time of loss. It differs from an unvalued policy, where the loss is measured at the time of the event.

Question 24Insurance Principles and Risk

Which of the following statements about reinsurance is correct?

  1. Reinsurance is purchased by the original insured to increase cover
  2. Reinsurance eliminates the need for the insurer to hold capital
  3. Reinsurance transfers risk from an insurer to another insurer Correct answer.
  4. Reinsurance is a form of co-insurance between the insured and the insurer

Explanation

Reinsurance is insurance for insurers, transferring part of the risk they have accepted to a reinsurer. It helps protect solvency and supports capacity for large or accumulating risks. It does not remove the need for capital, and the original insured's contract remains with the insurer.

Question 25Insurance Principles and Risk

An insured's building is damaged by an earthquake, but the policy covers only fire and specified perils. What is the likely outcome?

  1. The claim is payable because earthquakes often cause fires
  2. The claim is payable if the insured did not know about the exclusion
  3. The claim is payable under the principle of indemnity regardless of cover
  4. The claim is not payable because earthquake is not a covered peril Correct answer.

Explanation

Cover is limited to the perils specified in the policy, and losses from unlisted perils are not payable unless a special extension applies. Indemnity determines how much is paid for covered losses, not whether a peril is covered. Lack of knowledge of the terms does not create cover.

Question 26Insurance Principles and Risk

Which of the following best describes the principle of indemnity in a property insurance contract?

  1. The insured receives a fixed sum agreed at inception regardless of the actual loss.
  2. The insurer is entitled to recover its outlay from any third party responsible for the loss.
  3. The insured must disclose all material facts that would influence the insurer's decision.
  4. The insured is restored to the same financial position as immediately before the loss, subject to the sum insured. Correct answer.

Explanation

Indemnity means the insured is placed in the same financial position after the loss as before it, no better and no worse. Payment is therefore limited to the actual loss and cannot exceed the sum insured. It distinguishes insurance from gambling and prevents profit from loss.

Question 27Insurance Principles and Risk

An insured's factory is destroyed by fire. The policy has a sum insured of 500,000, but the reinstatement value of the property at the time of loss is 800,000. The policy contains an average (underinsurance) condition. Assuming the loss is total, how will the claim be settled?

  1. The insurer pays 500,000 less any salvage recovered from the site.
  2. The insurer pays 312,500, applying the proportion that the sum insured bears to the value at risk. Correct answer.
  3. The insurer pays 800,000, because the loss is total and the property is destroyed.
  4. The insurer pays 500,000, because the sum insured is the maximum payable.

Explanation

Under an average condition the insured is treated as a co-insurer for the shortfall. The claim is reduced by the ratio of the sum insured to the value at risk: 500,000 divided by 800,000, multiplied by the loss of 800,000, giving 312,500. The sum insured is therefore not simply the amount paid when the property is underinsured.

Question 28Insurance Principles and Risk

Which of the following best explains why an insurer may include a 'claims cooperation' condition in a liability policy?

  1. To limit the insurer's liability to the amount of the premium paid.
  2. To allow the insurer to cancel the policy at any time without refund of premium.
  3. To transfer to the insured the insurer's right to sue a third party.
  4. To require the insured to notify the insurer of any incident that may give rise to a claim and to assist in its investigation. Correct answer.

Explanation

Claims cooperation conditions require prompt notice and full assistance so the insurer can investigate, reserve funds, and defend or settle the claim. They protect the insurer's right to control the defence and avoid prejudice from late notice. They do not transfer rights or cap liability at the premium.

Question 29Insurance Principles and Risk

A commercial property policy excludes loss or damage caused by 'perils of a political nature, including war, civil commotion and confiscation'. A fire at the insured's warehouse is started by arson during a riot. How should the insurer assess the claim?

  1. The claim is excluded because riot falls within the political perils exclusion. Correct answer.
  2. The claim is payable only if the insured can prove the arsonist was not politically motivated.
  3. The claim is excluded because arson is always an excluded peril in commercial property policies.
  4. The claim is payable because fire is a covered peril and the exclusion applies only to declared war.

Explanation

The exclusion is worded to capture political perils including civil commotion, and a riot is a form of civil commotion. The proximate cause of the loss is therefore an excluded peril, so the claim is not payable even though fire is generally covered. The burden is not on the insured to prove political motivation.

Question 30Insurance Principles and Risk

Which of the following best describes the purpose of a 'salvage' provision in a property insurance policy?

  1. To reduce the premium payable in the following year by the value of any recovered property.
  2. To require the insured to abandon damaged property to the insurer and claim the full sum insured.
  3. To oblige the insured to take reasonable steps to prevent further damage and to preserve the insurer's rights over damaged property. Correct answer.
  4. To allow the insurer to take possession of damaged property and dispose of it for its own benefit after paying the claim.

Explanation

Salvage provisions require the insured to mitigate loss and to preserve what remains of the property so that its value can be realised for the benefit of the insurer. They support the principle of indemnity by ensuring that recovered value reduces the net cost of the claim. They do not entitle the insured to abandon property or claim the full sum insured.

Question 31Insurance Law and Regulation

Under the Insurance Act 2015 (UK), which duty does a commercial policyholder owe to the insurer before the contract is formed?

  1. A duty to guarantee the accuracy of every statement made
  2. A duty to disclose only facts the insurer expressly asks about
  3. A duty of fair presentation of the risk Correct answer.
  4. A duty to obtain independent legal advice on the proposal

Explanation

The Insurance Act 2015 replaced the old duty of disclosure with a duty of fair presentation of the risk. The insured must disclose material circumstances, make a reasonable search for them, and ensure representations are substantially correct and not misleading. This duty applies to commercial insureds and is the statutory baseline for pre-contract information.

Question 32Insurance Law and Regulation

A consumer buys home insurance online and answers a question about prior claims carelessly, though honestly. Under the Consumer Insurance (Disclosure and Representations) Act 2012, what standard applies to those answers?

  1. Disclosure of all circumstances a prudent insurer would want to know
  2. Absolute accuracy of every answer given
  3. Reasonable care to answer accurately and completely Correct answer.
  4. Disclosure limited strictly to facts the insurer asks about

Explanation

The 2012 Act abolished the consumer's duty of voluntary disclosure and replaced it with a duty to take reasonable care not to make a misrepresentation. The insurer must ask clear questions, and the consumer's answers are judged by whether reasonable care was taken. A careless but honest misrepresentation can still trigger proportionate remedies.

Question 33Insurance Law and Regulation

Which principle requires an insured to be indemnified for loss suffered, no more and no less, so that insurance does not become a source of profit?

  1. Contribution
  2. Indemnity Correct answer.
  3. Utmost good faith
  4. Subrogation

Explanation

The indemnity principle holds that the insured should be restored to the pre-loss financial position, neither enriched nor left out of pocket. It underpins rules on measure of loss, betterment and total loss. Subrogation and contribution are mechanisms that support indemnity rather than the principle itself.

Question 34Insurance Law and Regulation

An insured holds two property policies that both cover the same fire loss and contain rateable proportion clauses. What does the principle of contribution require?

  1. The insurer that issued the earlier policy pays the entire claim
  2. The insured may recover the full sum from either insurer and keep both payments
  3. The insured must forfeit cover under both policies
  4. Each insurer pays its rateable share so total recovery equals the loss Correct answer.

Explanation

Contribution applies where more than one policy indemnifies the same interest against the same peril. Each insurer pays only its proportion, ensuring the insured recovers the loss once without profiting. The insured cannot recover twice for the same loss.

Question 35Insurance Law and Regulation

What is the defining feature of a warranty in an insurance contract?

  1. It is a statement of opinion that has no contractual effect
  2. It is a condition precedent to the formation of the contract only
  3. It is a promise whose breach automatically discharges the insurer from liability from the date of breach Correct answer.
  4. It is a term that only creates a right to damages for the insurer

Explanation

At common law a warranty is a term of the insurance contract whose breach automatically discharges the insurer from liability as from the date of breach, regardless of causation. The Insurance Act 2015 modified this for non-consumer contracts by suspending cover during breach rather than terminating it. The defining feature remains that breach has a powerful effect on the insurer's liability.

Question 36Insurance Law and Regulation

Which body is the statutory regulator responsible for prudential and conduct supervision of insurers in the United Kingdom?

  1. The Financial Ombudsman Service
  2. Lloyd's of London
  3. The Association of British Insurers
  4. The Prudential Regulation Authority and the Financial Conduct Authority Correct answer.

Explanation

The PRA, part of the Bank of England, is responsible for prudential regulation of insurers, while the FCA handles conduct regulation. Both are statutory regulators under the Financial Services and Markets Act 2000. Industry bodies and dispute-resolution schemes do not exercise statutory regulatory powers.

Question 37Insurance Law and Regulation

What is the principal purpose of the Financial Services Compensation Scheme in relation to insurance?

  1. To arbitrate disputes between insurers and brokers over commission
  2. To set premium rates for the motor insurance market
  3. To approve policy wordings before they are sold
  4. To pay valid claims against insurers that are unable to meet their liabilities Correct answer.

Explanation

The FSCS provides a safety net for policyholders when an authorised insurer fails. It pays compensation for protected claims up to statutory limits. It does not set prices, approve wordings, or resolve commercial commission disputes.

Question 38Insurance Law and Regulation

Which characteristic distinguishes reinsurance from direct insurance?

  1. The reinsurer contracts directly with the original policyholder
  2. Reinsurance is sold only to individual consumers
  3. Reinsurance removes the insurer's obligation to pay valid claims
  4. The reinsurer indemnifies the insurer for losses arising under the original policies Correct answer.

Explanation

Reinsurance is insurance of the insurer's own liability exposure. The reinsurer indemnifies the ceding insurer, and there is generally no direct contractual relationship between reinsurer and original policyholder. The original insured's rights against the insurer remain unaffected by the reinsurance.

Question 39Insurance Law and Regulation

An insured deliberately sets fire to its own warehouse to claim the insurance money. What is the primary legal effect on the claim?

  1. The insurer may avoid the policy and refuse the claim for deliberate self-induced loss Correct answer.
  2. The insurer must pay because the fire peril is covered
  3. The claim is valid provided the insured notified the insurer promptly
  4. The insurer must pay but may recover the loss from the insured's directors

Explanation

Deliberately causing the insured loss is a fundamental breach of the duty of good faith and a criminal act. The insurer may avoid the policy and decline the claim, and may recover sums already paid. Prompt notification cannot validate a fraudulent claim.

Question 40Insurance Law and Regulation

Under the Insurance Act 2015, which remedy may an insurer have where a qualifying breach of the duty of fair presentation was deliberate or reckless?

  1. The insurer may only reduce the claim proportionately
  2. The insurer may cancel cover prospectively but must refund the premium
  3. The insurer must pay the claim in full but may raise future premiums
  4. The insurer may avoid the contract and retain the premium Correct answer.

Explanation

Where a breach of the duty of fair presentation is deliberate or reckless, the insurer may avoid the contract, refuse all claims and keep the premium. This is the most severe of the Act's proportionate remedies. Proportionate remedies apply only to non-deliberate breaches.

Question 41Insurance Law and Regulation

An insurer discovers that a commercial insured breached a contractual warranty two months ago but the breach has since been remedied. Under the Insurance Act 2015, what is the effect on cover during the period of breach?

  1. The insurer may avoid the contract from inception
  2. The insurer is liable for all losses because the breach was remedied
  3. The insurer may retain the premium and cancel all future cover
  4. The insurer has no liability for losses occurring during the breach but cover resumes once remedied Correct answer.

Explanation

Section 10 of the 2015 Act replaced automatic discharge with suspension: the insurer is not liable for losses occurring during the period of breach. Once the breach is remedied, cover resumes. The Act also restricts terms that purport to convert other terms into warranties.

Question 42Insurance Law and Regulation

Which statutory regime governs the authorisation and prudential supervision of insurers operating in the United Kingdom?

  1. The Companies Act 2006 alone
  2. The Marine Insurance Act 1906
  3. The Financial Services and Markets Act 2000 and rules made under it Correct answer.
  4. The Consumer Rights Act 2015

Explanation

The Financial Services and Markets Act 2000 establishes the regulatory framework, including authorisation, the FCA and PRA rulebooks and the statutory objectives. Insurers must be authorised and comply with prudential requirements such as capital and governance rules. Other statutes may apply but do not create the regulatory regime.

Question 43Insurance Law and Regulation

An insurer wishes to rely on a policy term that reduces cover for late notification of a claim. Under the Insurance Act 2015, what must the insurer show?

  1. That the term was printed in bold type in the policy schedule
  2. That the notification was more than seven days late in every case
  3. That the insured acted in bad faith
  4. That the insured's breach of the notification term increased the loss suffered by the insurer Correct answer.

Explanation

Section 11 of the 2015 Act provides that, for non-consumer contracts, a breach of a term about notification or the provision of information does not entitle the insurer to refuse a claim unless the breach increased the insurer's loss. The insurer's remedy is then limited to the additional loss caused.

Question 44Insurance Law and Regulation

What does the doctrine of subrogation entitle an insurer to do after paying a claim?

  1. Avoid the policy for non-disclosure discovered after payment
  2. Retain the insured's entire business records indefinitely
  3. Increase the premium without notice
  4. Pursue third parties liable for the loss in the insured's name, up to the amount paid Correct answer.

Explanation

Subrogation allows the insurer, once it has indemnified the insured, to step into the insured's shoes and pursue recovery from the party responsible for the loss. Recovery is limited to the amount paid, and any surplus belongs to the insured. The right is consistent with the indemnity principle.

Question 45Insurance Law and Regulation

A broker negligently fails to pass on a client's material information to the insurer, and the insurer later avoids the policy for non-disclosure. How is the broker's position generally analysed?

  1. The client has no remedy because non-disclosure is always the client's responsibility
  2. The broker may be liable to the client for breach of the duty to exercise reasonable skill and care Correct answer.
  3. The broker is protected because the client signed the proposal form
  4. The insurer must compensate the client directly for the broker's error

Explanation

A broker owes the client a duty to exercise reasonable skill and care, including transmitting material information accurately and promptly to the insurer. Where the broker's negligence causes the client to lose cover, the client may claim damages. The insurer is generally entitled to rely on the information it received.

Question 46Insurance Law and Regulation

Which statement best describes the effect of the Third Parties (Rights against Insurers) Act 2010?

  1. It requires all liability insurers to pay claims within 14 days
  2. It transfers ownership of the insured company to its creditors
  3. It allows a claimant to enforce an insured's liability insurance rights directly against the insurer in specified insolvency situations Correct answer.
  4. It abolishes the need for an insurable interest in liability policies

Explanation

The 2010 Act enables a third party with a claim against an insolvent insured to pursue the insurer directly, transferring the insured's rights under the policy. The Act streamlined the procedure compared with earlier legislation, allowing claims to be brought without first establishing liability in separate proceedings.

Question 47Insurance Law and Regulation

An insurer markets a policy as covering 'all risks of loss' but the small print excludes theft from unattended vehicles. A consumer argues the exclusion is unfair. Which regime is most relevant to assessing the fairness of that term?

  1. The Third Parties (Rights against Insurers) Act 2010
  2. The Proceeds of Crime Act 2002
  3. The Marine Insurance Act 1906
  4. The Consumer Rights Act 2015 provisions on unfair terms in consumer contracts Correct answer.

Explanation

The Consumer Rights Act 2015 consolidated consumer protection on unfair terms and requires transparency and fairness in consumer contracts. Terms that cause a significant imbalance to the consumer's detriment may be unenforceable. The other statutes address different areas of law entirely.

Question 48Insurance Law and Regulation

Which of the following best describes the role of the Financial Ombudsman Service in insurance disputes?

  1. It sets the capital requirements for insurers
  2. It prosecutes insurers for regulatory breaches
  3. It resolves eligible complaints between consumers and firms, with powers to award compensation up to statutory limits Correct answer.
  4. It drafts standard policy wordings for the market

Explanation

The Financial Ombudsman Service provides an independent dispute-resolution scheme for eligible complainants against authorised firms. It can make awards up to statutory limits and its decisions are binding on the firm if accepted by the complainant. It does not prosecute, set capital rules, or draft market wordings.

Question 49Insurance Law and Regulation

Which of the following is a key requirement for a valid contract of insurance at common law?

  1. A written policy signed by both parties in every case
  2. Approval of the premium by the regulator
  3. Offer, acceptance, consideration and an intention to create legal relations Correct answer.
  4. A minimum term of twelve months

Explanation

Insurance contracts are subject to general contract law, requiring offer, acceptance, consideration and intention to create legal relations. They need not always be in writing or of any particular duration, and premiums are not regulator-approved. Insurable interest is an additional statutory or common law requirement in many classes.

Question 50Insurance Law and Regulation

An insured fails to disclose a previous declined application when renewing a commercial policy. The insurer would have declined cover had it known. Which analysis is most consistent with the Insurance Act 2015?

  1. This may be a breach of the duty of fair presentation and the insurer may have remedies, potentially avoidance if the breach was deliberate or reckless Correct answer.
  2. The insurer must refer the matter to the Financial Ombudsman before taking any action
  3. The insurer must pay because renewal applications do not attract disclosure duties
  4. The insurer may only increase the premium for the following year

Explanation

The duty of fair presentation applies to renewals as well as new business. A declined application is typically a material circumstance that a prudent insurer would want to know. The remedy depends on the nature of the breach, with avoidance available where it was deliberate or reckless.