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Capital, Credit, and Insurance

103 questions

All types103Multiple choice51True / False12Numeric13Matching27
Question 101Question →

Which of the following correctly pairs each risk management concept in List A with its corresponding operational description in List B?

Click a left item, then click its matching right item

Items

Underwriting
Reinsurance
Co-insurance
Retrocession

Matches

Show answer & explanation

Answer

Underwriting matches the assessment and pricing of risk; Reinsurance matches a primary insurer transferring risk to another insurer; Co-insurance matches multiple insurers entering direct contracts with the policyholder; Retrocession matches a reinsurer ceding risk to another reinsurer.
Underwriting is the evaluation and pricing of risk. Reinsurance is risk shifting from a direct insurer to a reinsurer without insured involvement. Co-insurance is joint direct coverage between the policyholder and multiple insurers. Retrocession is reinsurance for reinsurers.

Step-by-Step Solution

1
Identify the risk evaluation and pricing mechanism.
Underwriting corresponds to assessing, selecting, classifying, and pricing risks prior to issuing cover.
Underwriting is the core diagnostic function performed by insurers before contract formation.
2
Differentiate between risk transfers involving the insured versus those restricted to insurers.
Co-insurance involves direct contractual relationships between the policyholder and multiple insurers, whereas Reinsurance is a secondary contract purely between the primary insurer and a reinsurer.
Reinsurance maintains no contractual relationship (privity of contract) with the original insured, while Co-insurance creates direct liability for each insurer to the insured.
3
Define the secondary transfer of liability within the reinsurance market.
Retrocession matches the process of a reinsurer spreading its accepted risk to another reinsurer.
Retrocession functions as insurance for reinsurance companies to prevent excessive concentration of loss.

Key Concept

Operational distinctions between Reinsurance, Co-insurance, Underwriting, and Retrocession
Question 102Question →

A commercial bank applies for ₦2 billion property insurance coverage for its nationwide vault network. Meridian Assurance evaluates the financial risk involved, determines the premium rate, and sets the policy terms before issuing the cover. Which of the following functions is Meridian Assurance performing in this process?

Show answer & explanation

Answer: Underwriting

Answer

Underwriting
Underwriting is the fundamental insurance procedure wherein an insurer examines a proposed risk, evaluates the likelihood of a claim, determines terms and conditions, and calculates the appropriate premium before agreeing to cover the risk.

Step-by-Step Solution

1
Analyze the action performed by Meridian Assurance in the scenario.
Meridian Assurance is evaluating the risk, determining the premium rate, and setting policy conditions for the applicant.
Identifying the core operational activity described in the stem is required to select the correct insurance concept.
2
Match the identified activity to the standard insurance definitions.
The process of assessing risk, deciding on acceptability, and fixing premium terms is defined as underwriting.
Underwriting directly describes the evaluation and pricing phase conducted by an insurer prior to issuing coverage.

Key Concept

Underwriting
Question 103Question →

Commercial enterprises rely on insurance to mitigate risks and sustain economic growth. Match each role of insurance in commerce on the left with its corresponding operational benefit to business on the right.

Click a left item, then click its matching right item

Items

Provision of business continuity
Enhancement of credit rating for loans
Facilitation of foreign trade
Creation of employment opportunities

Matches

Show answer & explanation

Answer

Provision of business continuity matches with absorbing accidental losses to ensure enterprise survival; Enhancement of credit rating for loans matches with providing financial security for bank credit facilities; Facilitation of foreign trade matches with protecting traders against marine hazards and payment risks; Creation of employment opportunities matches with generating career paths for insurance professionals.
Each role of insurance directly corresponds to a specific operational mechanism: preserving solvency maintains continuity, backing loans enhances creditworthiness, protecting ocean transport facilitates foreign trade, and staffing insurance firms generates employment.

Step-by-Step Solution

1
Identify the primary economic role of insurance in mitigating business operational risk.
Provision of business continuity matches the absorption of accidental losses to prevent insolvency.
Indemnity replaces lost assets and restores the business to its former financial position.
2
Analyze how insurance facilitates capital acquisition and financing.
Enhancement of credit rating for loans matches providing collateral confidence to commercial banks.
Lenders prefer lending against insured assets because the risk of loss is transferred to an insurer.
3
Examine how insurance aids international commercial transactions.
Facilitation of foreign trade matches protecting exporters and importers against marine cargo risks.
International commerce involves long distances and sea hazards best covered by marine and export credit insurance.
4
Determine the direct tertiary industry benefit of insurance.
Creation of employment opportunities matches providing professional career paths for underwriters and brokers.
Insurance operates as a major commercial sector employing various skilled personnel.

Key Concept

Role and Importance of Insurance in Business and Commerce
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