Model Answer for revision exercise

Chapter 11: Insurance

Section A: Objectives

1. C

2. C

3. C

4. B

5. C

6. A

7. B

8. D

9. D

10. A

Section B: Fill in the blanks

1.

i. Principle of Insurable Interest

ii. Principle of Indemnity

iii. Principle of Proximate Cause

iv. Principle of Utmost Good Faith

v. Rule of Contribution

2. Premium

3. Insurance Policy

4. Non-Insurable Risk

5. Beneficiary
Section C: Essays

1. Describe the importance of Insurance to the individuals, organisation and the development of a
country.

The importance of Insurance to the individuals, organisation and the development of a country are as
follows:

First, protection of personal interests and alleviate social problems. The insurance policy may save
us many troubles if we are placed in a situation where we must pay a sum that highly exceeds our
possibilities. Compensation by the insurance companies can reduce the financial burden of individuals
and families; in addition, it also enhances the social harmony.

Next, contributes in the development of organization. Fires, floods, theft and etc have been the end
of many businesses due to financial deterioration. Business insurance protects a business from closing
due to a catastrophic loss. Besides that, it also encourages the entrepreneur to have more investment
which will enhance social and economic development.

Besides that, provision of personal or business loan and capital. Individuals or businessmen can
mortgage their life assurance policies to banks in order to obtain bank loan. Other than that, the
insurance companies will use the premium to invest in the stock market or deposit in the bank, these
investment funds will eventually become a source of financing for the industrial and commercial
enterprises.

Last but not least, provide state funds. Insurance companies will manage the insurance funds
properly, which usually invested in government bond or Treasure Bill, these will become a source of
government financing.

2. What are the Principles of Insurance? State and briefly explain all of them.

The four principles of insurance are as follows:

First of all, it is Principle of Utmost Good Faith. The insured must disclose fully all material facts
known in answering all questions in the proposal form and in all dealings with the insurance company.
If the insured is found to have violated the Principle of Utmost Good Faith such as fails to disclose the
whole truth will make the policy become void and the insurance company will refuse to pay
compensation should a loss occur

Secondly, it would be Principle of Insurable Interest. We can only insure those things in which
we have insurable interest. To have insurable interest in something means to be in danger of suffering
loss or incurring some personal liability should the thing be destroyed or damaged. For example: , people
have insurable interests in their own houses and vehicles, but not in their neighbours' houses and
vehicles.
 Next, it would be Principle of Indemnity. It means all compensation to the insured who had suffered
a loss would be to indemnify him, and not to allow him to make a profit out of his misfortune. Principle
of Indemnity applies to all contracts of insurance except Life Assurance and Personal Accident
Insurance.There are two subsidiary Principle of Indemnity, which are Rule of Contribution and Rule of
Subrogation.

Last but not least, Principle of Proximate Cause. This means that the insured will only be
compensated if his loss was caused directly by the risk he has insured against. For example, Mr Wong
has insured his life against personal accident, but his death is cause by heart attack during driving, then
the insurance company will not make compensation on this incident.

3. Draw a diagram to show the Procedures of Insurance Claim that to be followed by the parties
involved in order to get compensation from the insurance company.

The procedure of insurance claim

Question 4 refers to the following information:

a) Can they claim back the ownership of the television?

No.

b) What rule of the Principle of Insurance is this based on?

Rule of Subrogation.

c) Briefly explain the above Principle of Insurance.

It means that when the insurance company has paid out the claims, it ‘subrogates’ or steps into the
place of the insured and inherits all his rights and remedies against third parties. This can prevent the
insured to get a double benefit .