[Introduction to Risk and Insurance]
What is a disadvantage of loss retention through borrowing?
Correct Answer: B
When an organization chooses to handle losses through borrowing, it is using debt financing—usually a bank loan or line of credit—to pay for losses instead of transferring the risk through insurance. While this may offer flexibility, it has several drawbacks. The most significant is that borrowing reduces the company’s available line of credit, limiting funds that could otherwise be used for operations, expansion, or emergencies.
This reduction in liquidity can create financial strain, especially if multiple losses occur or if interest rates rise. Borrowing also increases debt obligations, which can affect cash flow and borrowing capacity.
Option A is incorrect; special accounting is not necessarily required beyond standard debt tracking.
Option C is not inherently a disadvantage—senior management involvement is routine in risk management.
Option D is incorrect; the difficulty of borrowing is determined by creditworthiness, not by the presence of assets.
Thus, B is the correct disadvantage.
[Insurance as a Contract: The Insurance Policy]
Which clause pays replacement cost even if the loss exceeds the amount of insurance on the dwelling?
Correct Answer: D
A Guaranteed Replacement Cost (GRC) clause is a special provision in homeowners’ insurance that ensures the insurer will pay the full cost to rebuild or repair the dwelling even if the loss exceeds the stated policy limit, provided all policy conditions are met (such as insuring to value and notifying the insurer of changes to the building).
This clause protects homeowners from unexpected increases in construction costs due to inflation, labour shortages, or material price spikes. The insurer guarantees complete reconstruction of the home, not merely up to policy limits.
Option A is not a recognized policy clause.
Option B (total replacement cost clause) is not the standard industry term.
Option C (pure restitution clause) does not exist in homeowners insurance terminology.
The only accurate clause that obligates the insurer to pay above policy limits is the Guaranteed Replacement Cost clause.
[Insurance Documents and Processes]
Which problem could arise with an oral binder?
Correct Answer: D
An oral binder is a legally recognized temporary contract that provides immediate insurance coverage before a written policy is issued. While oral binders are valid in all Canadian provinces, their reliability depends entirely on whether the intermediary actually has binding authority from the insurer. If the broker or agent who gives the oral binder does not have the authority to commit the insurer, then the binder may not be valid, and coverage may not exist. This makes lack of authority the primary risk associated with oral binders.
Option A is incorrect—oral binders are legal across Canada.
Option B is incorrect—a binder cannot override policy warranties; it simply provides temporary coverage.
Option C is unrelated; privacy documentation is not what makes a binder valid or invalid.
Thus, the key problem is that the intermediary may not have binding authority, making D the correct answer.
[Insurance Companies / Reinsurance]
An insurer writes a $60,000,000 risk for a premium of $30,000. Using pro rata reinsurance, it transfers 25% of the risk to the reinsurer. The risk then suffers a $100,000 loss. How much does the reinsurer contribute to this loss?
Correct Answer: A
In pro rata (proportional) reinsurance, the reinsurer assumes a fixed percentage of both the risk and the premium, and in return pays the same percentage of any losses. Here, the insurer cedes 25% of the risk to the reinsurer. Therefore, the reinsurer must contribute 25% of any loss that occurs on that policy.
The loss amount is $100,000.
Reinsurer’s share = 25% $100,000 = $25,000.
The insurer retains the remaining 75%, or $75,000. Proportional reinsurance helps insurers manage exposure by sharing both costs and losses. Options B, C, and D do not correctly reflect proportional-sharing principles. The reinsurer does not pay the full loss; it only pays its agreed percentage.
Thus, the correct answer is A: $25,000.
[Insurance Documents and Processes — Subscription Policies]
Which type of policy must be signed by a member of each participating insurer?
Correct Answer: C
A subscription policy is used when a single insurance risk is too large for one insurer to assume alone. Multiple insurers participate in the policy, each taking a percentage of the risk. Because each insurer is directly responsible for its portion, the policy must be signed by each participating insurer, acknowledging its share of liability.
Option A, prescription, refers to legal limitation periods.
Option B, all-inclusive, is not a recognized type of policy requiring multiple insurer signatures.
Option D, subrogation, is a legal right—not a policy type.
Only the subscription policy requires signatures from all insurers involved, making C correct.
Prep2Certsis a premium service offering a comprehensive collection of exam questions and answers for over 1400 certification exams. It is regularly updated and designed to help users pass their certification exams confidently.
Please contact info@Prep2Certs.com and we will provide you with alternative payment options.
You can by Contacting our sales team.