Deck 9: Risk Management and Insurance

Question 1

In the event of a claim, an indemnity value house and contents policy will:

A) provide a payout equal to the market value of the loss incurred at the time of the loss.
B) include the effects of depreciation in establishing a value for the items subject to the claim.
C) both a and b .
D) replace all items at their current replacement value.

Answer 1

C

Question 2

Severity limitations in insurance contracts:

A) seek to transfer the financial risk to the insurer.
B) limit the liability of the insured.
C) none of the above.
D) may include the removal of policy excesses.

Answer 2

C

Question 3

Compulsory third party (CTP) motor vehicle insurance covers:

A) the legal liability of the driver arising out of the use of the vehicle.
B) the damage to the vehicle, whether for repairs or if the vehicle is a total loss.
C) the insured or the driver (driving with the insured's consent) for their legal liability in relation to property damage as a result of an accident arising out of the use of the vehicle.
D) both a and c

Answer 3

A

Question 4

Risk management includes the following steps, in order, to be addressed:

A) identifying risks, developing control and financing measures, implementing agreed upon plans and on-going review.
B) implementing agreed upon plans, identifying risks, developing control and financing measures and on-going review.
C) developing control and financing measures, implementing agreed upon plans, identifying risks and on-going review.
D) developing control and financing measures, identifying risks, implementing agreed upon plans and on-going review.

Question 5

The feature of guaranteed renewal for a term life policy protects the:

A) insured.
B) insurer.
C) both a and b .
D) the Insurance Council.

Question 6

Methods of minimising insurance premiums from the insurer's perspective include:

A) reducing the average risk profile of new entrant.
B) increasing the average risk profile of new entrant.
C) reducing the total number of entrants.
D) both a and c

Question 7

The convertibility option for term life insurance policies provides for:

A) such clause to be included in the relevant policy document subject to a medical examination.
B) the insured to convert the current policy into ordinary shares at a discount to the current share price.
C) the insured to convert the current policy into any other type of insurance policy so long as the sum insured does not alter.
D) both a and c

Question 8

Benefit payments from an income protection policy will generally be:

A) reduced by any sick leave or compensation payments received by the insured during the claim period.
B) unaffected by any sick-leave or compensation payments received by the insured during the claim period.
C) increased by any investment income earned during the claim period.
D) none of the above.

Question 9

Consumer credit insurance policies will exclude claims by the insured in which of the following circumstances?

A) The insured has a drug or alcohol addiction.
B) The death of the insured.
C) Sickness of the insured extending beyond a period of 12 months.
D) Both a and c

Question 10

The multiple approach to calculating the needs of dependants regarding life insurance:

A) is quite straightforward and can be used to calculate the total amount of cover necessary.
B) has an underlying assumption that the needs of all people are very similar.
C) generally ignores the individual's resources and commitments.
D) all of the above.

Question 11

Indexing a sum insured for life cover typically:

A) is automatic and does not require a medical examination.
B) will cease if the insured declines the indexation increase 5 times in succession.
C) will cease if the insured declines the indexation increase 6 times in succession.
D) both a and c

Question 12

When assessing how personal risk losses can be financed, which of the following alternatives are not possible in Australia?

A) Meeting losses from personal financial resources.
B) Transferring risks to a third party.
C) Applying for assistance from the personal risk loss relief fund.
D) None of the above.

Question 13

In Australia, federal government regulations prohibit health insurance providers from charging higher insurance premiums for people who:

A) are obese.
B) smoke.
C) drink alcohol.
D) all of the above.

Question 14

The areas from which a legal liability can arise include:

A) common law.
B) statute law.
C) contract.
D) all of the above.

Question 15

Gambling from the gambler's perspective is a good example of what type of risk?

A) Pure risk.
B) Speculative risk.
C) Arbitrage risk.
D) Property risk.

Question 16

A terminal illness benefit is:

A) typically included in a basic term life policy.
B) paid as a regular income for a specified period.
C) generally limited to a total payment of $1 million.
D) both a and c

Question 17

Life insurance products can:

A) provide for insured amounts not necessarily related to the actual loss.
B) be regarded as indemnity-type products.
C) both an and b
D) none of the above.

Question 18

Term life insurance policies taken out through a superannuation fund where salary sacrifice contributions are arranged to fund the amount of the premium payment via the employer will:

A) be subject to a contributions tax of 15% by the recipient superannuation fund.
B) be tax deductible to the employer as concessional superannuation contributions.
C) be paid out on death tax-free to a dependant.
D) both b and c

Question 19

The effect of the 'co-insurance' or 'average' clause included in a house and contents policy is to:

A) increase payouts to policyholders if they are over-insured at the time of making a claim.
B) decrease payouts to policyholders if they are under-insured at the time of making a claim.
C) both a and b .
D) ensure that a claim rejection arising from late payment can be overturned by the courts.

Question 20

In Australia:

A) there is a national compensation arrangement for consumers of financial services.
B) holders of an Australian Financial Services Licence (AFSL) can elect whether or not to hold professional indemnity insurance or alternatively pay an additional licence fee to the government.
C) professional indemnity insurance provides the public with a consumer compensation scheme.
D) none of the above.

Question 21

Wayne Markus recently lost his house and contents in a bushfire that ravaged the area in which he lives. Wayne had previously contracted the construction of the house to a local building firm on land that he had been left in an inheritance from his late aunt about 5 years ago. The construction costs at the time totalled $180,000 and he spent $40,000 on various appliances, furniture, fixtures and fittings for the home (home contents). The current construction costs for a similar house would be $260,000 and the cost of replacing his home contents would be $45,000. The market value of the home contents at the time of the fire was $15,000. Luckily for Wayne, he had a current home and contents insurance policy with the HAH Insurance Company at the time of the bushfire.
a) Calculate the total value of the insurance claim to be made by Wayne if the home and contents policy was a replacement value policy.
b) Calculate the total value of the insurance claim to be made by Wayne if the home and contents policy was an indemnity value policy.
c) Comment on the likely premiums payable on each of the policies offered in parts a) and b) of this question - that is, although the sum insured is the same, will the premiums also be the same?

Question 22

The use of the multiple approach for calculating a lump sum benefit to be taken out pursuant to a life insurance policy has been strongly criticised as being too simplistic in nature. Outline the basis for such criticism.

Question 23

Tony Verdello's 4-year old property located on a fault line was recently severely affected by an earthquake. The total replacement value of Tony's property including contents at the time of the earthquake was $400,000. The percentage of the property damaged by the earthquake was estimated by the insurance company claims officer to be 60%. The property was originally built by Tony at a total cost including contents of $245,000. The specific information included in Tony's home and contents insurance policy relating to claims made are as follows:
? insurance is provided on a 'new for old' basis
? the total sum insured is $280,000
? a co-insurance clause operates which is set at 80% of the current replacement value of the home and contents.
Advise Tony as to the amount of the total home and contents claim payable by the insurance company and how this would compare to the maximum claim otherwise available.

Question 24

Using the information provided in the previous question, Ms. Maryanne To is uncertain as to whether the 25 year term will be sufficient to meet the financial needs of her dependants given that her youngest daughter has a disability.
a) Calculate the life insurance cover required (to the nearest $'000) assuming that the payments would continue indefinitely and that Maryanne's financial dependants would withdraw their income requirements on an annual basis in arrears after receiving an initial payment of $100,000 upon her death.
b) What difference would it make to your calculations in part a) of this question if the earnings rate was increased to 8%? Why would such difference be expected?

Question 25

Discuss whether a financial adviser would be liable for a claim against their professional indemnity (PI) insurance policy where their clients have experienced significant financial decreases in the value of adviser implemented investment portfolios arising from a sustained downturn in investment markets.

Question 26

Ms. Maryanne To is seeking to calculate the amount of life insurance cover required to provide for her financial dependants on an after-tax basis. Currently Maryanne earns $45,000 p.a. after-tax and she has assessed that approximately 80% of this amount will be needed on an annual basis to support her financial dependants as income if she died in addition to an initial capital amount of $100,000 at the time of her death. After investigating the various methods available, Maryanne has decided to use the multiple approach to assist in the calculation of the relevant life insurance cover required. Given her conservative nature and that of her financial dependants, Maryanne considers that an earnings rate of 6% would be reasonable to use in any calculations and that her dependants would require financial support for a term of 25 years.
a) Calculate the life insurance cover required (to the nearest $'000) assuming that Maryanne's financial dependants would withdraw their income requirements on a monthly basis in arrears.
b) Calculate the life insurance cover required (to the nearest $'000) assuming that Maryanne's financial dependants would withdraw their income requirements on a six-monthly basis in arrears.
c) Comment on the basis for any differences in your results in parts a) and b) of this question.

Question 27

One of your financial planning clients, Ms. Renee Gardener has requested your advice in relation to a policy of life insurance she has decided to take out. Renee is single, 21 years of old and is living with her parents. She has recently secured full-time employment as a nail technician upon graduating with an advanced diploma from a local college. Having accepted the general provisions of the life policy, Renee is unsure as to whether it would be best for her to make premium payments based on a stepped or level basis. Provide some general advice to Renee in relation to her query.

Question 28

Comment on the factors that are relevant in selecting the type of motor vehicle insurance that would be most appropriate following a recent vehicle purchase.

Question 29

Why is insurance cover more important in the event of prolonged illness or injury in comparison to such event arising for a relatively short duration?

Question 30

a) Outline the principal differences between the measures of speculative risk and pure risk.
b) Justify which of the above measures is more commonly associated with policies of insurance.