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III IC-104 practice questions

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Question 1Insurance Institute of India professional examination subject area (not enumerated in source)

Under a standard fire insurance policy, which peril is treated as a 'special peril' that must be specifically added by endorsement rather than being covered under the basic fire cover?

  1. Bush fire
  2. Explosion of a boiler used for domestic purposes
  3. Lightning
  4. Riot, strike and malicious damage Correct answer.

Explanation

The standard fire cover extends to fire, lightning and explosion of domestic boilers or gas cylinders used for domestic purposes. Riot, strike and malicious damage are special perils that attach only through a specific endorsement with additional premium. Bush fire is also a special peril added by endorsement, but the riot cover is the classic example of an extended special peril.

Question 2Insurance Institute of India professional examination subject area (not enumerated in source)

In marine hull insurance, the principle that the insured value agreed in the policy is conclusive between the parties, in the absence of fraud, is known as:

  1. Valued policy Correct answer.
  2. Declaration policy
  3. Floating policy
  4. Unvalued policy

Explanation

A valued policy fixes the insurable value of the subject matter by agreement at the inception of the contract, and that sum is conclusive in the event of a total loss absent fraud. Marine hull policies are typically issued on a valued basis so that the measure of indemnity is settled in advance. Unvalued policies leave the value to be proved by the insured at the time of loss.

Question 3Insurance Institute of India professional examination subject area (not enumerated in source)

A health insurance policy contains a waiting period of 30 days. A policyholder was hospitalised for a fever on the 20th day after inception. How is the claim generally treated?

  1. Not payable because the claim falls within the initial waiting period Correct answer.
  2. Payable only if the hospital is on the network list
  3. Payable at 50 percent as a goodwill measure
  4. Payable in full because the illness is genuine

Explanation

The initial waiting period excludes claims arising from illness during the first 30 days of cover, so a hospitalisation on day 20 falls outside the payable period. The purpose is to prevent anti-selection by persons who buy cover after sensing illness. Accidents are normally excluded from this waiting period, but the fever here is an illness.

Question 4Insurance Institute of India professional examination subject area (not enumerated in source)

Which of the following best describes 'subrogation' in insurance?

  1. The insured's duty to disclose all material facts
  2. The sharing of a loss between two insurers covering the same risk
  3. The insurer's right to recover from a third party after paying the insured Correct answer.
  4. The reduction of the sum insured after a partial loss

Explanation

Subrogation is the insurer's right, after indemnifying the insured, to step into the insured's shoes and pursue recovery from the party responsible for the loss. It supports the principle of indemnity by preventing the insured from recovering twice. It is a corollary of indemnity and applies to non-life covers.

Question 5Insurance Institute of India professional examination subject area (not enumerated in source)

In a life insurance contract, the insurer's obligation to pay the sum assured arises on the occurrence of the insured event. Which characteristic distinguishes life insurance from most general insurance contracts?

  1. It is annually renewable at the insurer's option
  2. It is a contract of indemnity
  3. It requires the insured to prove the exact financial loss
  4. It is a contingent contract where the sum assured is paid on death or maturity Correct answer.

Explanation

Life insurance is a contingent contract under which the insurer pays a stated sum on death or survival to maturity, and it is not a contract of indemnity. The sum assured is agreed at the outset and is not measured against actual financial loss. Long-term level premiums and guaranteed renewal are typical features.

Question 6Insurance Institute of India professional examination subject area (not enumerated in source)

In motor insurance, the No Claim Bonus (NCB) is best described as:

  1. A discount on premium granted for a claim-free year Correct answer.
  2. A compulsory deductible on every claim
  3. A loading applied to young drivers
  4. A penalty imposed for late renewal

Explanation

The No Claim Bonus is a premium discount that rewards a policyholder who does not make a claim during the preceding policy year, and it builds up over successive claim-free years. It is a renewal benefit that encourages safe driving and reduces small claims. It is not a deductible or a penalty.

Question 7Insurance Institute of India professional examination subject area (not enumerated in source)

Under the Insurance Regulatory and Development Authority of India (IRDAI) framework, an insurance agent's licence must be renewed. Which statement correctly reflects the licensing requirement for an individual agent?

  1. The licence is permanent once granted
  2. The licence requires no training or examination
  3. The licence is valid for a fixed term and must be renewed before expiry Correct answer.
  4. The licence is issued only to corporate entities

Explanation

Individual agent licences are granted for a defined term and must be renewed in accordance with IRDAI regulations, with training and examination requirements preceding the grant of a licence. A lapsed licence means the person cannot solicit or procure insurance business. The licence is not permanent and is not confined to corporate entities.

Question 8Insurance Institute of India professional examination subject area (not enumerated in source)

In a reinsurance arrangement, the ceding insurer retains the first portion of every loss up to a stated amount and the reinsurer pays the excess. This arrangement is called:

  1. Retrocession
  2. Excess of loss reinsurance Correct answer.
  3. Facultative reinsurance
  4. Quota share reinsurance

Explanation

Excess of loss reinsurance protects the ceding insurer against losses above a retention amount, with the reinsurer paying the excess up to the agreed limit. It is a non-proportional form of reinsurance. Quota share, by contrast, shares a fixed percentage of every risk and premium.

Question 9Insurance Institute of India professional examination subject area (not enumerated in source)

A fire policy is issued for a sum insured of Rs 10,00,000 on a property whose actual value at the time of loss is Rs 20,00,000. A loss of Rs 2,00,000 occurs. Applying the average clause, how much is payable?

  1. Rs 1,00,000 Correct answer.
  2. Rs 50,000
  3. Rs 2,00,000
  4. Rs 20,00,000

Explanation

The average clause applies where the sum insured is less than the value of the property, and the claim is reduced in the proportion that the sum insured bears to the value. Here the ratio is 10,00,000/20,00,000, i.e. one half, so the payable amount is Rs 1,00,000. This penalises under-insurance and preserves the indemnity principle.

Question 10Insurance Institute of India professional examination subject area (not enumerated in source)

In a marine cargo policy, the coverage that extends from the seller's warehouse to the buyer's warehouse, including transit by sea and land, is described as:

  1. Constructive total loss cover
  2. Running down clause cover
  3. Warehouse to warehouse cover Correct answer.
  4. Free of particular average

Explanation

Warehouse to warehouse cover attaches from the moment goods leave the consignor's warehouse and continues through the ordinary course of transit until delivery at the consignee's warehouse. It bridges the gap between inland transit and the sea voyage. It is a standard feature of marine cargo insurance.

Question 11Insurance Institute of India professional examination subject area (not enumerated in source)

A proposal form for a life insurance policy contains a declaration that the answers given are true and complete and form the basis of the contract. This clause is known as:

  1. Surrender value clause
  2. Suicide clause
  3. Grace period clause
  4. Basis clause Correct answer.

Explanation

The basis clause makes the statements in the proposal the basis of the contract, so any material misrepresentation may render the policy voidable. It strengthens the insurer's position on disclosure. It is distinct from the grace period, surrender value and suicide provisions, which deal with other policy features.

Question 12Insurance Institute of India professional examination subject area (not enumerated in source)

A commercial property policy carries a coinsurance clause requiring the insured to insure for at least 80 percent of the property's value. The insured carries Rs 60,00,000 on property valued at Rs 1,00,00,000 and suffers a loss of Rs 10,00,000. What is the payable amount under the coinsurance clause?

  1. Rs 7,50,000 Correct answer.
  2. Rs 8,00,000
  3. Rs 6,00,000
  4. Rs 10,00,000

Explanation

The coinsurance requirement is 80 percent of Rs 1,00,00,000, i.e. Rs 80,00,000, but only Rs 60,00,000 is carried. The claim is therefore reduced by the ratio of carried insurance to the required amount, 60/80, giving Rs 7,50,000 on a loss of Rs 10,00,000. This penalises insurance below the agreed percentage.

Question 13Insurance Institute of India professional examination subject area (not enumerated in source)

In liability insurance, the 'claims made' basis of cover differs from the 'occurrence' basis because claims made cover responds to:

  1. Claims notified after the policy has expired in all circumstances
  2. Incidents occurring during the policy period, regardless of when claims are notified
  3. Only incidents occurring and notified in the same policy year
  4. Claims notified during the policy period, regardless of when the incident occurred Correct answer.

Explanation

Under a claims made policy, the insurer on risk when the claim is notified responds, subject to any retroactive date, irrespective of when the wrongful act occurred. Professional indemnity covers are often written on this basis. Occurrence policies instead respond to incidents that happen during the policy period.

Question 14Insurance Institute of India professional examination subject area (not enumerated in source)

An insured deliberately sets fire to his own insured stock to claim the sum insured. Which principle bars the claim?

  1. Public policy as reflected in the exclusion of wilful misconduct Correct answer.
  2. Utmost good faith
  3. Indemnity
  4. Insurable interest

Explanation

Deliberate acts by the insured to bring about the insured event are excluded because insurance cannot be allowed to encourage wrongdoing. This reflects public policy and the requirement that the loss be fortuitous. The claim would be repudiated and could attract criminal liability.

Question 15Insurance Institute of India professional examination subject area (not enumerated in source)

A personal accident policy provides a weekly benefit equal to 1 percent of the capital sum insured for temporary total disablement, subject to a maximum of 100 weeks. If the capital sum insured is Rs 20,00,000, what is the weekly benefit?

  1. Rs 2,000
  2. Rs 20,000 Correct answer.
  3. Rs 200
  4. Rs 1,00,000

Explanation

One percent of Rs 20,00,000 is Rs 20,000 per week, payable while temporary total disablement continues, subject to the 100-week cap. The benefit compensates for loss of income during recovery. It ceases when the insured returns to work or the maximum period is exhausted.

Question 16Insurance Institute of India professional examination subject area (not enumerated in source)

In a group health insurance policy, which underwriting feature distinguishes it from individual health policies?

  1. Individual medical underwriting of every member
  2. Annual renewal at the option of each member
  3. Exclusion of all pre-existing diseases permanently
  4. Underwriting at the group level with limited individual medical evidence Correct answer.

Explanation

Group health policies are underwritten at the level of the group, with rates based on the group's claims experience and demographic profile, and individual members usually face little or no medical underwriting. This reduces administrative cost and encourages employer-sponsored cover. Individual policies, by contrast, involve member-level underwriting.

Question 17Insurance Institute of India professional examination subject area (not enumerated in source)

Which document issued by an insurer provides temporary evidence of cover pending issue of the formal policy?

  1. Cover note Correct answer.
  2. Claim form
  3. Endorsement
  4. Renewal notice

Explanation

A cover note is a temporary document evidencing that insurance has been effected, and it remains valid until the formal policy is issued or the stated period expires. It is particularly useful where immediate proof of cover is required, such as for vehicle registration. The formal policy later supersedes it.

Question 18Insurance Institute of India professional examination subject area (not enumerated in source)

Under the Motor Vehicles Act requirements in India, a policy of insurance in respect of a motor vehicle must cover liability arising out of:

  1. Death or bodily injury to third parties and damage to third-party property Correct answer.
  2. Damage to the insured vehicle only
  3. Driver's own injury only
  4. Theft of the insured vehicle only

Explanation

Compulsory third-party liability cover under the Motor Vehicles Act extends to death or bodily injury caused to third parties and to damage to third-party property, subject to the statutory limit. Own-damage cover is optional and separate. The statutory requirement exists to protect innocent victims of road accidents.

Question 19Insurance Institute of India professional examination subject area (not enumerated in source)

In fire insurance, the 'reinstatement value' basis of settlement differs from the 'market value' basis because reinstatement value:

  1. Pays the cost of replacing or reinstating the property without deducting depreciation, subject to conditions Correct answer.
  2. Pays only the book value shown in the accounts
  3. Limits payment to the original purchase price
  4. Deducts depreciation from the cost of replacing the property

Explanation

Reinstatement value cover pays the cost of replacing or rebuilding the damaged property with new material of like kind and quality, without deducting depreciation, provided the property is actually reinstated. It is suited to buildings and machinery where market value would under-insure. Market value cover, by contrast, deducts depreciation.

Question 20Insurance Institute of India professional examination subject area (not enumerated in source)

A reinsurance treaty under which the reinsurer accepts a fixed percentage of every risk written by the ceding insurer within a defined class, sharing premium and losses in the same proportion, is:

  1. Surplus reinsurance
  2. Stop loss reinsurance
  3. Quota share reinsurance Correct answer.
  4. Excess of loss reinsurance

Explanation

Quota share reinsurance is a proportional treaty in which the ceding insurer and reinsurer share every risk, premium and loss in a fixed percentage. It is simple to administer and provides automatic capacity. Surplus reinsurance is also proportional but cedes only the amount above a retention that varies by risk.

Question 21Insurance Institute of India professional examination subject area (not enumerated in source)

An insured holds two fire policies on the same property, each for the full value, and suffers a loss. How do the insurers settle the claim?

  1. The insured recovers the full loss from one insurer of his choice
  2. Each insurer pays the full loss
  3. The insured recovers nothing because of double insurance
  4. The insurers share the loss proportionately under the principle of contribution Correct answer.

Explanation

Where the same interest is insured against the same peril with more than one insurer, the insured may claim from any one, but the insurers adjust the loss among themselves under the principle of contribution. The insured cannot recover more than the actual loss. Double insurance does not invalidate the cover.

Question 22Insurance Institute of India professional examination subject area (not enumerated in source)

In the context of insurance regulation, the 'file and use' procedure for product approval generally means that an insurer may:

  1. Obtain approval only after the product has been sold for one year
  2. Market a product only after prior approval of every policy wording by the regulator
  3. Market any product without any filing obligation
  4. File the product details with the regulator and commence marketing without awaiting prior approval, subject to compliance Correct answer.

Explanation

Under file and use, the insurer files the product with the regulator and may proceed to market it without waiting for prior approval, provided the product complies with the applicable regulations. The regulator retains the power to require modifications. It speeds up product launch while preserving regulatory oversight.

Question 23Insurance Institute of India professional examination subject area (not enumerated in source)

In a unit-linked insurance plan (ULIP), the risk of investment performance is borne by:

  1. The regulator, which guarantees a minimum return
  2. The insurer, because the sum assured is guaranteed
  3. The agent, who is responsible for fund selection
  4. The policyholder, because the fund value varies with market performance Correct answer.

Explanation

In a ULIP the premiums, after deduction of charges, are invested in funds chosen by the policyholder, and the fund value fluctuates with market performance. The investment risk therefore rests with the policyholder, unlike a traditional with-profits or endowment policy where benefits are largely guaranteed. The insurer guarantees only the stated sum assured on death, if any.

Question 24Insurance Institute of India professional examination subject area (not enumerated in source)

A marine cargo policy incorporates the Institute Cargo Clauses (C). Which statement best describes the scope of cover?

  1. It covers only total loss of the entire shipment
  2. It covers all risks of loss or damage to the cargo
  3. It covers specified major perils such as sinking, stranding, collision and fire, but not partial loss from other causes Correct answer.
  4. It covers war and strikes risks automatically

Explanation

Institute Cargo Clauses (C) provide the narrowest of the three standard sets, covering specified perils such as fire, explosion, sinking, stranding, collision and discharge at a port of distress, but not partial loss from other causes. Clauses (B) and (A) provide progressively wider cover, with (A) being all risks. War and strikes risks require separate clauses.

Question 25Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer issues a policy with a 'condition precedent to liability' requiring the insured to maintain a fire-fighting system in working order. Following a fire, it is found that the system had been deliberately disabled for weeks. What is the likely effect on the claim?

  1. The claim is payable because conditions precedent apply only to liability policies
  2. The claim is payable at 50 percent as a compromise
  3. The claim may be repudiated because the condition precedent to liability was not complied with Correct answer.
  4. The claim is payable because the fire was accidental

Explanation

A condition precedent to liability must be satisfied before the insurer's obligation to pay arises, so breach of such a condition entitles the insurer to repudiate the claim. The deliberate disabling of the system is a clear breach. Conditions precedent differ from mere conditions, which generally give rise only to a right to damages.

Question 26Insurance Institute of India professional examination subject area (not enumerated in source)

Under the Insurance Act, 1938, an insurer registered in India must maintain a deposit with the Reserve Bank of India as a condition of carrying on insurance business. The primary purpose of this statutory deposit is to:

  1. Provide a fund available to meet the claims of policyholders if the insurer defaults Correct answer.
  2. Serve as the capital contribution of the insurer's shareholders
  3. Finance the agent commission pool shared across all insurers
  4. Pay the salaries of Insurance Regulatory and Development Authority of India (IRDAI) officials

Explanation

The statutory deposit is a security fund held for the protection of policyholders; it is available for meeting policy liabilities if the insurer fails. It is not operational revenue for the regulator, nor a shared commission pool, nor shareholder capital.

Question 27Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer wishes to transact both life insurance and general insurance business in India. Under the regulatory framework, this is permitted only if the insurer:

  1. Obtains a single composite licence without any segregation of funds
  2. Obtains a separate registration for each class and maintains separate funds and accounts Correct answer.
  3. Restricts itself to selling only unit-linked products in the life segment
  4. Reinsures the entire general insurance portfolio with a state-owned reinsurer

Explanation

A composite insurer must hold separate registrations for life and general business and keep segregated funds and accounts so that one class cannot draw on the other's assets. A single undivided licence is not the route, and reinsurance or product restriction does not cure the segregation requirement.

Question 28Insurance Institute of India professional examination subject area (not enumerated in source)

A policyholder's proposal is accepted and the first premium is paid, but the insurer has not yet issued the policy document. In life insurance, the insurer's liability in these circumstances is best described as:

  1. Deferred until the free-look period has expired
  2. Limited to refund of the premium without any risk cover
  3. Arising only when the physical policy document is delivered to the policyholder
  4. Commencing from the date of receipt of the premium, subject to the terms of the conditional acceptance Correct answer.

Explanation

Where the insurer has accepted the risk and received the premium, cover normally commences from that date under the terms of acceptance; the issue of the document is administrative. Delivery of the document, expiry of the free-look period and mere refund are not the tests for commencement of risk.

Question 29Insurance Institute of India professional examination subject area (not enumerated in source)

Under the standard fire and special perils policy, the 'removal of debris' cover is provided:

  1. Automatically as part of the basic cover without any limit
  2. As an add-on cover available on payment of additional premium, subject to a specified limit Correct answer.
  3. Only for properties located in industrial estates
  4. Only when the sum insured exceeds the actual value of the property

Explanation

Removal of debris expenses are not part of the basic fire cover; they are granted as an extension on payment of extra premium, usually with a stated percentage or monetary limit. The other options describe conditions that do not govern this extension.

Question 30Insurance Institute of India professional examination subject area (not enumerated in source)

A shopkeeper insures his stock for Rs 5,00,000 under a fire policy. A fire causes a loss of Rs 2,00,000 and, at the time of loss, the stock actually in the shop is worth Rs 10,00,000. Assuming no other clause applies, the amount payable is:

  1. Rs 1,00,000 Correct answer.
  2. Rs 10,00,000
  3. Rs 2,00,000
  4. Rs 5,00,000

Explanation

The policy is underinsured to the extent of half the value at risk, so the average condition reduces the claim proportionately: Rs 2,00,000 x (5,00,000/10,00,000) = Rs 1,00,000. Paying the full loss or the sum insured would ignore the principle of indemnity and the average clause.

Question 31Insurance Institute of India professional examination subject area (not enumerated in source)

In a health insurance policy, the 'waiting period' for pre-existing diseases means that:

  1. The insurer can cancel the policy at any time during that period
  2. The sum insured is reduced by half during that period
  3. The policyholder must pay a higher premium for the first year only
  4. Claims arising from those diseases are excluded until the stated continuous period of cover has elapsed Correct answer.

Explanation

A waiting period postpones cover for pre-existing conditions until the insured has been continuously covered for the specified term. It does not alter the premium, confer arbitrary cancellation rights or halve the sum insured.

Question 32Insurance Institute of India professional examination subject area (not enumerated in source)

A personal accident policy defines 'permanent total disablement' as loss of sight of both eyes. An insured loses the sight of one eye. Under a typical policy with a specified percentage for loss of one eye, the benefit payable is:

  1. No benefit, because the loss is not permanent total disablement
  2. The stated percentage of the capital sum insured for loss of one eye Correct answer.
  3. A weekly temporary total disablement benefit until recovery
  4. The full capital sum insured as for permanent total disablement

Explanation

Personal accident policies list specific injuries with percentages of the capital sum insured, and loss of one eye attracts the stated partial disablement percentage. It does not qualify as permanent total disablement, and temporary total benefit applies to inability to work, not to a permanent loss of this kind.

Question 33Insurance Institute of India professional examination subject area (not enumerated in source)

In marine insurance, the principle of 'utmost good faith' is particularly significant because:

  1. The Marine Insurance Act prohibits any survey of the cargo
  2. Marine losses are settled only by arbitration
  3. The insurer has little practical means of inspecting the subject matter and must rely on the assured's disclosure Correct answer.
  4. Marine policies are always issued without a proposal form

Explanation

The subject matter is often beyond the insurer's reach, so full disclosure of material facts by the assured is essential for the insurer to assess the risk. The absence of a proposal form, a statutory bar on surveys and mandatory arbitration are not the reasons for the doctrine.

Question 34Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer issues a marine hull policy with a deductible of Rs 50,000 on each claim. A covered loss of Rs 1,80,000 occurs. The indemnity payable, before any other adjustment, is:

  1. Rs 1,80,000
  2. Rs 50,000
  3. Rs 1,30,000 Correct answer.
  4. Rs 2,30,000

Explanation

A deductible is deducted from each covered loss, so the insurer pays Rs 1,80,000 minus Rs 50,000 = Rs 1,30,000. The gross loss, the deductible itself or an addition to the loss are not the indemnity.

Question 35Insurance Institute of India professional examination subject area (not enumerated in source)

Under a motor package policy, the 'own damage' section responds to:

  1. Accidental damage to or loss of the insured vehicle itself Correct answer.
  2. Statutory liability arising from the death of a pedestrian
  3. Bodily injury caused to a third party by the insured vehicle
  4. Damage to goods carried in the vehicle for hire or reward

Explanation

The own damage section indemnifies damage to or loss of the insured vehicle, while third-party injury and death fall under the liability section. Goods carried for hire or reward are generally excluded and third-party liability is a separate section.

Question 36Insurance Institute of India professional examination subject area (not enumerated in source)

A goods vehicle is insured under a motor policy that covers liability only. The vehicle meets with an accident and the insured's own vehicle is badly damaged. The insurer's position is:

  1. No payment for the vehicle's damage, because own damage cover was not purchased Correct answer.
  2. Payment of the repair cost subject to the no claim bonus
  3. Payment of the full repair cost as part of the liability cover
  4. Payment of half the repair cost under the statutory liability section

Explanation

A liability-only policy responds to third-party claims and does not indemnify damage to the insured's own vehicle. Repair costs, whether full or partial, cannot be recovered under the liability section, and no claim bonus relates to own damage renewals.

Question 37Insurance Institute of India professional examination subject area (not enumerated in source)

In a workmen's compensation (employees' compensation) insurance policy, the insurer's liability is determined by:

  1. The benefits prescribed under the Employees' Compensation Act for the injured employee Correct answer.
  2. The amount the employer chooses to pay as ex gratia
  3. The market value of the injured employee's tools
  4. The premium paid by the employee personally

Explanation

The policy indemnifies the employer against the statutory compensation payable under the Employees' Compensation Act for employment injury. Ex gratia payments, tool values and employee-paid premiums are not the measure of statutory liability.

Question 38Insurance Institute of India professional examination subject area (not enumerated in source)

An employer takes out a public liability policy. A member of the public is injured on the employer's premises due to the employer's negligence. The policy responds because:

  1. The injury occurred on the insured's own premises, which is automatically covered
  2. The injured person is a contractual counterparty
  3. The insured's legal liability to a third party for bodily injury is covered Correct answer.
  4. The employee is covered under the employees' compensation policy

Explanation

Public liability insurance indemnifies the insured against legal liability to third parties for bodily injury or property damage arising from the business. The employees' compensation policy covers employees, not members of the public, and the mere location of the injury is not the test.

Question 39Insurance Institute of India professional examination subject area (not enumerated in source)

In a professional indemnity policy for an architect, cover is typically provided for:

  1. Loss of the architect's personal vehicle
  2. Injury to workers on a construction site
  3. Damage to the architect's own office equipment
  4. Claims arising from negligent professional advice or design causing financial loss to a client Correct answer.

Explanation

Professional indemnity responds to legal liability for breach of professional duty, including negligent design or advice causing financial loss. Damage to the insured's own property, site worker injuries and vehicle losses fall under other policies.

Question 40Insurance Institute of India professional examination subject area (not enumerated in source)

A fidelity guarantee policy protects an employer against:

  1. Damage to the employer's vehicles in transit
  2. Loss caused by fire to the employer's building
  3. Loss of money or property caused by the fraud or dishonesty of named employees Correct answer.
  4. Liability to the public for defective products

Explanation

Fidelity guarantee covers the employer for financial loss due to fraudulent or dishonest acts of specified employees. Fire damage, product liability and vehicle damage are covered by other classes of insurance.

Question 41Insurance Institute of India professional examination subject area (not enumerated in source)

In a contract of insurance, the doctrine of 'subrogation' after the insurer has paid a claim allows the insurer to:

  1. Increase the sum insured without additional premium
  2. Step into the insured's legal rights and recover the loss from the party responsible Correct answer.
  3. Sell the damaged property to recover the claim amount
  4. Cancel the policy and recover the premium from the insured

Explanation

Subrogation transfers to the paying insurer the insured's right of recovery against the third party who caused the loss, so that the insured does not recover twice. It does not permit cancellation, unilateral increase of the sum insured or sale of the damaged property.

Question 42Insurance Institute of India professional examination subject area (not enumerated in source)

An insured suffers a loss that is covered by two indemnity policies taken out with different insurers. The principle of contribution provides that:

  1. The insured must choose one insurer and surrender the other policy
  2. The insurer that issued the earlier policy pays the entire loss
  3. The insured may recover the full loss from each insurer and keep both amounts
  4. Each insurer pays its rateable share so that the insured recovers no more than the actual loss Correct answer.

Explanation

Contribution requires the insurers to share the loss rateably so that the insured is indemnified but does not profit. Recovering twice, placing the whole burden on the earlier insurer or forcing surrender of a policy are not consequences of the principle.

Question 43Insurance Institute of India professional examination subject area (not enumerated in source)

A reinsurance arrangement in which the reinsurer pays a commission to the ceding insurer to meet the ceding insurer's acquisition costs is known as:

  1. Salvage recovery
  2. Subrogation recovery
  3. Reinsurance commission Correct answer.
  4. Premium reserve

Explanation

Reinsurance commission is the allowance paid by the reinsurer to the ceding insurer to share the cost of acquiring the business. Salvage and subrogation are recoveries on claims, and a premium reserve is an accounting provision, not a commission.

Question 44Insurance Institute of India professional examination subject area (not enumerated in source)

In a facultative reinsurance arrangement, the ceding insurer:

  1. Must cede all risks falling within the treaty automatically
  2. May offer each risk individually and the reinsurer may accept or decline it Correct answer.
  3. Cannot retain any part of the risk for its own account
  4. Delegates underwriting decisions to the reinsurer for all policies

Explanation

Facultative reinsurance is negotiated risk by risk, giving both parties the freedom to offer and to accept or decline. Automatic cession of all risks within a class is treaty reinsurance, and the ceding insurer normally retains a share.

Question 45Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer writing a large industrial all-risks policy uses a 'risk management' survey before acceptance. The main purpose of the survey is to:

  1. Satisfy a statutory filing requirement for the product
  2. Fix the premium without reference to the nature of the risk
  3. Determine the agent's commission on the policy
  4. Identify and evaluate hazards so that the risk can be priced and controlled Correct answer.

Explanation

A risk survey identifies physical and moral hazards, suggests loss-control measures and helps the underwriter set terms and premium. It is not a substitute for rating, a mere filing formality or a basis for agent commission.

Question 46Insurance Institute of India professional examination subject area (not enumerated in source)

A 'claims-made' liability policy with a retroactive date of 1 April 2023 responds to a claim reported in 2025 for an act:

  1. Committed before 1 April 2023, provided the insured was unaware of it
  2. Committed at any time, provided the claim is reported during the policy period
  3. Committed after the policy expires but reported during the policy period
  4. Committed on or after 1 April 2023, provided the claim is reported during the policy period Correct answer.

Explanation

The retroactive date bars cover for acts before that date, and the claims-made trigger requires the claim to be notified during the policy period. Acts before the retroactive date, and acts after the policy has expired, fall outside the cover.

Question 47Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer discovers that a policyholder concealed a material fact at proposal that would have led to a higher premium. The policy has been in force for three years and a claim has now arisen. Under the law relating to misrepresentation, the insurer's strongest position is to:

  1. Pay the claim in full and increase the premium only at the next renewal
  2. Cancel the policy prospectively and pay the current claim in full
  3. Refer the matter to the agent and recover the claim from the agent
  4. Avoid the contract for concealment of a material fact and repudiate the claim Correct answer.

Explanation

Concealment of a material fact that induced the contract allows the insurer to avoid the contract and repudiate liability, subject to any statutory limits on avoidance. Prospective cancellation with full payment, renewal-only adjustment or recovery from the agent do not reflect the remedy for concealment.

Question 48Insurance Institute of India professional examination subject area (not enumerated in source)

An insurer applies a 'file and use' procedure to a new product. This means the insurer:

  1. Must obtain prior written approval of the regulator before any policy is issued
  2. Files the product with the regulator and may use it after the specified waiting period unless the regulator objects Correct answer.
  3. Need not file the product at all if the premium is below a threshold
  4. May launch the product immediately and file it only after one year

Explanation

Under file and use, the insurer files the product terms with the regulator and may market it after the prescribed period if no objection is raised. Prior approval is a different route, and deferral or exemption from filing are not features of the procedure.

Question 49Insurance Institute of India professional examination subject area (not enumerated in source)

A customer buys a unit-linked insurance policy with a premium allocation charge that reduces in later years. The effect of this charge structure is that:

  1. The mortality charge is eliminated in the later years
  2. The policy acquires a guaranteed surrender value from the first day
  3. The sum assured automatically increases each year by the amount of the charge
  4. A larger proportion of the premium is invested in the early years' later periods as the charge falls Correct answer.

Explanation

Because the allocation charge is deducted before units are purchased, a falling charge means more of each later premium is invested. It does not increase the sum assured, remove mortality charges or create a guaranteed surrender value from day one.

Question 50Insurance Institute of India professional examination subject area (not enumerated in source)

An insured under a fire policy fails to comply with a condition requiring him to take reasonable steps to minimise loss after a fire, and the loss is greater as a result. The insurer may:

  1. Reduce or reject the claim to the extent the loss was aggravated by the failure Correct answer.
  2. Increase the sum insured to cover the aggravated loss
  3. Pay the claim in full and recover the excess from the fire brigade
  4. Reject the entire claim in every case without any apportionment

Explanation

Breach of a loss-mitigation condition entitles the insurer to reduce or reject liability to the extent the breach increased the loss, rather than automatically avoiding the whole claim. Full payment, recovery from the fire service or an increase in the sum insured are not available remedies.