📊 NISM Series X-BChapter 1 of 20⚖ 8 marks weightageCase-Based ✓
Ch.1: Basics of Insurance
Practice questions for NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination
(mandated by SEBI under the Investment Advisers Regulations, 2013).
Chapter 1 carries 8 out of 150 marks
in the final examination. The exam has 90 MCQs + 9 case-based sets (5 sub-questions each, mixed 1-mark
and 2-mark weighting), 180-minute duration, 60% passing score, and 25% negative marking on the marks
of each wrong answer.
35
MCQ
1
Case Sets
40
Total Qs
8
Exam Marks
60%
Pass Score
−25%
Neg. Marking
What You Will Learn in This Chapter
Understand the fundamental principles and need for insurance
Know key insurance terminology and core concepts
Understand the role of IRDAI in regulating the insurance sector
Q1MCQ · 1 markHardFundamental Principles of Insurance
An individual applies for a life insurance policy and deliberately omits information about a family history of a critical genetic illness, believing it's not relevant since they themselves are currently healthy. The policy is issued, but years later, the individual files a claim for the very illness they had concealed. Based on the fundamental principles of insurance discussed in the text, what is the most likely outcome?
AThe insurance company is obligated to pay the claim, as the individual was healthy at the time of policy issuance.
BThe insurance company will pay the claim but will increase future premiums for the individual.
✓The insurance company has the right to reject the claim entirely due to a breach of utmost good faith.
DThe claim will be paid, but the payout amount will be reduced proportionally to the undisclosed risk.
💡 The principle of 'Utmost good faith (Uberrimae Fidei)' requires the insured to disclose all relevant information truthfully, including family history of medical conditions. The text states: 'If this is not done, the Insured is said to have acted in breach of good faith. At times, the insured does not reveal the relevant information... However, when a claim comes up, investigation by the insurer may throw up the facts about the information that were suppressed. Based on that, the insurer has the right to reject the claim entirely.'
Q2MCQ · 1 markHardConcepts in Insurance
Which of the following statements accurately distinguishes between an Indemnity Insurance policy and a Defined Benefit Insurance plan, according to the provided text?
AIndemnity policies always pay a fixed sum, while defined benefit plans reimburse actual losses.
BLife insurance is an example of an indemnity policy because the exact loss of future income is difficult to ascertain.
✓A defined benefit plan is used when it's certain a loss occurred but difficult to ascertain the exact actual loss, or when the cost of determining actual loss is high.
DHealth insurance for hospitalisation expenses is a defined benefit plan, whereas a fixed daily hospital allowance is an indemnity policy.
💡 Option A is incorrect. Indemnity policies reimburse actual losses, while defined benefit plans pay a fixed sum. Option B is incorrect. Life insurance is a defined benefit policy, not an indemnity policy. Option C is correct. The text states: 'A defined benefit plan is used in situations where it is certain that a loss has been incurred due to the happening of the covered event but: ● it is difficult to ascertain the exact actual loss caused... ● the amount of loss is small and the cost of determining the “actual loss” might not be worth the actual amount of loss caused.' Option D is incorrect. Health insurance for hospitalisation expenses is an indemnity policy, while a fixed daily hospital allowance is a defined benefit plan.
Q3MCQ · 1 markMediumBasics of Insurance - Premium Calculation
In the Merchant Ships example, 100 merchants sent one ship each month, with an average of 2 ships lost at sea. The loss per ship was Rs. 10,00,000. If only 40 of these merchants agreed to participate in the insurance pool, what would be the premium each of the participating merchants would need to pay to cover the total expected loss?
ARs. 20,000
BRs. 40,000
✓Rs. 50,000
DRs. 1,00,000
💡 The total loss suffered by all merchants together was Rs. 20,00,000 (2 ships * Rs. 10,00,000/ship). If only 40 merchants agree to pay the premium, the total loss of Rs. 20,00,000 must be divided among these 40 merchants. Therefore, the premium per merchant would be Rs. 20,00,000 / 40 = Rs. 50,000.
Q4MCQ · 1 markMediumPremium Calculation / Law of Large Numbers
In the merchant ship example, 100 merchants initially agree to pay a premium of Rs. 20,000 each to cover a total expected loss of Rs. 20,00,000. If only 40 of these merchants agree to participate in the insurance pool, what would be the premium payable by each participating merchant, assuming the total expected loss remains the same?
ARs. 20,000
BRs. 40,000
✓Rs. 50,000
DRs. 10,000
💡 The total loss suffered by all merchants together was Rs. 20,00,000. If only 40 merchants agree to pay the premium, the premium per merchant would be calculated as: Total Loss / Number of Participating Merchants = Rs. 20,00,000 / 40 = Rs. 50,000.
Q5MCQ · 1 markMediumPremium Calculation
In the Merchant Ships example, 100 merchants each sent one ship. The loss per ship was Rs. 10,00,000, and on average, 2 ships were lost each month. If only 40 of these merchants agree to participate in the insurance pool to cover the total expected loss, what would be the premium payable by each participating merchant?
ARs. 20,000
BRs. 25,000
CRs. 40,000
✓Rs. 50,000
💡 According to the example, the total loss suffered by all merchants together was Rs. 20,00,000 (i.e., Rs. 10,00,000 multiplied by 2 ships that were lost). If only 40 merchants agree to pay the premium, the total loss of Rs. 20,00,000 must be covered by these 40 merchants. Therefore, the premium per participating merchant would be Rs. 20,00,000 / 40 = Rs. 50,000.
Q6MCQ · 1 markMediumRequirements of Insurable Risk
Which of the following is NOT a requirement for a risk to be considered insurable, as per the provided text?
AThe loss must be accidental and unintentional.
BThe chance of loss must be calculable by the insurer.
✓The risk must involve a prospect of speculative gain.
DThere must be a large number of exposure units.
💡 The text explicitly states under 'No prospect of gain or profit' that 'it must be pure risk with only the possibility of full or partial loss. Speculative risk is not insurable.' Options A, B, and D are all listed as requirements for an insurable risk.
Q7MCQ · 1 markMediumFundamental Principles of Insurance
The principle of 'Utmost good faith' (Uberrimae Fidei) in insurance primarily places the obligation of disclosure on which party, and why?
AOn the insurer, to reveal all policy terms and conditions clearly.
✓On the insured, due to the information asymmetry where the insured is better informed about themselves.
COn the insurer, to conduct thorough medical tests for all potential policyholders.
DOn the insured, to ensure they pay the lowest possible premium.
💡 The text states, 'Since the insured is better informed about himself or herself than the insurer, there is an information asymmetry between the two parties... The obligation is on the insured to disclose all relevant information truthfully.'
Q8MCQ · 1 markMediumFundamental Principles of Insurance
An individual applying for a life insurance policy deliberately withholds information about a family history of a severe genetic ailment. If the insurer later discovers this suppression of material information when a claim is made, what action can the insurer take as per the principle of Utmost Good Faith?
AThe insurer must still pay the claim but can increase future premiums.
✓The insurer can reject the claim entirely.
CThe insurer can pay a reduced claim amount proportionate to the undisclosed risk.
DThe insurer can only take action if the undisclosed ailment was the direct cause of the claim.
💡 The text states: 'If this is not done, the Insured is said to have acted in breach of good faith... Based on that, the insurer has the right to reject the claim entirely.'
Q9MCQ · 1 markMediumRequirements of an Insurable Risk
As per the requirements of an insurable risk, why is investing in the stock market generally not considered an insurable risk?
AThe chance of loss is not calculable with sufficient accuracy.
✓It involves a speculative risk with the possibility of both gain and loss.
CThere is no insurable interest in stock market investments.
DThe premium required would not be economically feasible.
💡 The text states that a characteristic of insurable risk is 'No prospect of gain or profit', meaning it must be a pure risk with only the possibility of full or partial loss. Investing in the stock market is given as an example of a speculative risk, which is not insurable because it may result in both loss and gain.
Q10MCQ · 1 markMediumPremium Calculation
In the Merchant Ships example, the total loss suffered by all merchants together was Rs. 20,00,000. Originally, 100 merchants participated, each paying Rs. 20,000 as premium. If only 50 merchants decided to participate in the insurance pool, what would be the premium amount each participating merchant would have to pay to cover the total expected loss, assuming the total loss remains the same?
ARs. 20,000
BRs. 25,000
✓Rs. 40,000
DRs. 50,000
💡 The total expected loss is Rs. 20,00,000. If only 50 merchants participate, the total loss must be divided among these 50 merchants to determine the premium per merchant. Premium per merchant = Total Loss / Number of participating merchants = Rs. 20,00,000 / 50 = Rs. 40,000.
Q11MCQ · 1 markMediumConcepts in Insurance
According to the chapter, which of the following is an example of a defined benefit insurance plan?
AA health insurance policy that reimburses actual hospitalisation expenses incurred.
BA property insurance policy that covers the actual loss incurred due to fire damage to a building.
✓A life insurance policy that pays a pre-fixed sum of money on the death of the insured.
DA marine insurance policy that indemnifies the merchant for the actual loss of a ship at sea.
💡 A defined benefit insurance plan pays a fixed sum of money based on a pre-estimated amount of loss upon the happening of a covered event. Life insurance is explicitly mentioned as a good example because it pays a pre-fixed sum without ascertaining the exact actual loss.
Q12MCQ · 1 markMediumConcepts in Insurance - Benefit vs. Indemnity
Which of the following scenarios best illustrates a 'Defined Benefit Insurance' plan as described in the chapter?
AA health insurance policy that reimburses the actual hospitalisation expenses incurred by the insured.
BA fire insurance policy that pays the exact value of the damaged property after assessment.
✓A life insurance policy that pays a pre-fixed sum of money upon the death of the insured, regardless of the exact financial loss caused.
DA motor insurance policy that covers the repair costs of a vehicle involved in an accident up to the sum assured.
💡 The text defines a defined benefit insurance plan as one where 'a fixed sum of money, based on pre-estimated amount of loss, is paid on the happening of a covered event.' It explicitly states, 'A life Insurance policy is a good example of a defined benefit insurance as it pays a pre-fixed sum of money on the death of the insured person without really trying to ascertain the exact actual loss caused due to the death of the insured person.' Options A, B, and D describe indemnity policies where actual loss is determined and reimbursed.
Q13MCQ · 1 markMediumRequirements of an Insurable Risk
Which of the following characteristics of an insurable risk explains why investing in the stock market is generally considered a speculative risk and therefore not insurable?
AThe loss must be determinable and measurable.
BThere must be a large number of exposure units.
✓There should be no prospect of gain or profit.
DThe chance of loss must be calculable.
💡 Under the requirement 'e. No prospect of gain or profit,' the text explicitly states: 'A further characteristic of the insurable risk is that it does not involve any prospect of gain or profit. In other words, it must be pure risk with only the possibility of full or partial loss. Speculative risk is not insurable. For example, investing in the stock market may result in loss, but it may also result in gain and as such this is a speculative risk and therefore not insurable.'
Q14MCQ · 1 markEasyFundamental Principles of Insurance
Which of the following principles states that an insured must disclose all relevant information truthfully, including medical history, habits, and profession, to the insurer?
APrinciple of Indemnity
BInsurable Interest
✓Utmost Good Faith (Uberrimae Fidei)
DLaw of Large Numbers
💡 The principle of 'Utmost Good Faith (Uberrimae Fidei)' obligates the insured to disclose all relevant information truthfully, such as medical history, habits, and profession, as this information can influence the insurer's risk perception.
Q15MCQ · 1 markEasyBasics of Insurance
According to the provided text, which of the following best describes the primary role of insurance?
ATo generate profit for the insured through speculative investments.
✓To provide protection against the loss of economic benefits that can be enjoyed from assets.
CTo prevent unforeseen or unexpected events from occurring.
DTo eliminate all risks associated with physical and human assets.
💡 The text states, 'Insurance is a basic form of risk management that provides protection against the loss of the economic benefits that can be enjoyed from assets.' It also clarifies that events themselves can only be minimized but not totally prevented (C), and it's not for profit (A). It doesn't eliminate all risks (D).
Q16MCQ · 1 markMediumFundamental Principles of Insurance - Utmost Good Faith
According to the principle of Utmost Good Faith (Uberrimae Fidei) in insurance, what is the primary obligation of the insured, and what are the consequences of failing to meet this obligation?
AThe insured is obligated to undergo all medical tests requested by the insurer, and failure to do so results in a higher premium.
✓The insured is obligated to disclose all relevant information truthfully, and failure to do so may lead to the insurer rejecting a claim entirely.
CThe insured is only required to disclose information specifically asked by the insurer, and any undisclosed information cannot be used to reject a claim.
DThe insurer has the primary obligation to investigate all facts about the insured, and the insured's disclosure is secondary.
💡 The text states: 'The obligation is on the insured to disclose all relevant information truthfully... If this is not done, the Insured is said to have acted in breach of good faith... Based on that, the insurer has the right to reject the claim entirely.'
Q17MCQ · 1 markEasyNeed for Insurance
According to the chapter, what is the fundamental role of insurance in risk management?
ATo completely prevent unforeseen events from occurring.
BTo generate profit by investing collected premiums.
✓To provide protection against the loss of economic benefits that can be enjoyed from assets.
DTo identify and eliminate all forms of speculative risk.
💡 The text states, 'Insurance is a basic form of risk management that provides protection against the loss of the economic benefits that can be enjoyed from assets.'
Q18MCQ · 1 markMediumConcepts in Insurance
Which of the following scenarios best represents a 'Defined Benefit Insurance' plan, as described in the text?
AA health insurance policy that reimburses the actual hospitalisation expenses incurred by the insured.
BA property insurance policy that covers the exact cost of repair or replacement of a damaged asset.
✓A life insurance policy that pays a pre-fixed sum of money upon the death of the insured person.
DA motor insurance policy that covers the cost of damages to a vehicle up to its market value.
💡 The text defines a 'Defined Benefit Insurance' plan as one where 'a fixed sum of money, based on pre-estimated amount of loss, is paid on the happening of a covered event.' It specifically states, 'A life Insurance policy is a good example of a defined benefit insurance as it pays a pre-fixed sum of money on the death of the insured person without really trying to ascertain the exact actual loss caused.' Options A, B, and D describe indemnity policies, where the payout is based on the actual loss suffered.
Q19MCQ · 1 markMediumBasics of Insurance (Example Application)
In the Merchant Ships example, if only 40 of the original 100 merchants agreed to participate in the insurance pool, and the total loss suffered by all merchants together (from 2 lost ships) remained Rs. 20,00,000, what would be the premium payable per participating merchant?
ARs. 20,000
BRs. 25,000
CRs. 40,000
✓Rs. 50,000
💡 The text explicitly provides this scenario: 'In the merchant ships example, if only 40 of the merchants agree to pay the premium, it can increase to Rs. 50,000 per merchant (i.e. Rs. 20,00,000 loss divided by 40 merchants), as against Rs. 20,000 (if all 100 merchants participate).' Calculation: Total loss = Rs. 20,00,000. Number of participating merchants = 40. Premium per merchant = Total loss / Number of participating merchants = Rs. 20,00,000 / 40 = Rs. 50,000.
Q20MCQ · 1 markHardRequirements of an Insurable Risk - Large Number of Exposure Units
In the Merchant Ships example, if the total loss suffered by all merchants remains Rs. 20,00,000 per month, but only 50 out of the 100 merchants agree to participate in the insurance fund, what would be the premium payable by each participating merchant? Assume the risk of 2 ships being lost will still be covered from the pool.
ARs. 20,000
✓Rs. 40,000
CRs. 50,000
DRs. 10,000
💡 The total loss to be covered by the insurance fund is Rs. 20,00,000.
If only 50 merchants participate, the total loss must be divided among these 50 merchants to determine the premium per merchant.
Premium per merchant = Total Loss / Number of Participating Merchants = Rs. 20,00,000 / 50 = Rs. 40,000.
The text provides a similar calculation: 'if only 40 of the merchants agree to pay the premium, it can increase to Rs. 50,000 per merchant (i.e. Rs. 20,00,000 loss divided by 40 merchants)'.
Q21MCQ · 1 markEasyBasics of Insurance
According to the provided text, what is a fundamental purpose of insurance?
ATo enable individuals to profit from unforeseen events.
✓To transfer risk from the beneficiary to an insurance company.
CTo encourage risk retention by individuals.
DTo eliminate the possibility of any financial loss.
💡 The text states, 'Insurance enables risk transfer from the beneficiary (Insured) to the insurance company (Insurer), which undertakes to indemnify the insured for the financial loss suffered.' Option A contradicts the 'No prospect of gain or profit' principle. Option C describes the alternative to insurance, not its purpose. Option D is an overstatement, as insurance indemnifies against financial loss but does not eliminate the event or all types of loss.
Q22MCQ · 1 markMediumRequirements of an Insurable Risk
Which of the following statements accurately describes the requirement for a risk to be insurable regarding its accidental and unintentional nature, specifically in the context of life insurance?
✓Loss must be accidental, unintentional, and uncertain; life insurance is an exception because death is certain, but its time is uncertain.
BAll insurable risks, including death in life insurance, must be entirely accidental and unintentional to be covered.
CThe time of death is certain, making life insurance an exception to the rule that loss must be uncertain.
DLife insurance is insurable because the event of death is both accidental and unintentional, similar to other insurable risks.
💡 The text states: 'Loss must be accidental, unintentional and uncertain. The only exception is life insurance where the event being insured against, namely death, is certain. However, the time of death is uncertain, which makes it insurable.'
Q23MCQ · 1 markEasyConcepts in Insurance
Based on the provided text, which of the following best describes the difference between an Indemnity Insurance policy and a Defined Benefit Insurance plan?
AIndemnity policies cover physical assets, while Defined Benefit plans cover human assets.
BIndemnity policies pay a fixed sum regardless of actual loss, while Defined Benefit plans reimburse exact losses.
✓Indemnity policies require determination of actual loss before payout, while Defined Benefit plans pay a pre-fixed sum based on pre-estimated loss.
DIndemnity policies are only for non-life insurance, whereas Defined Benefit plans are exclusively for life insurance.
💡 The text defines Indemnity Insurance as requiring 'a determination of actual loss suffered by the insured person before a pay-out of a claim is made'. In contrast, a Defined Benefit Insurance plan pays 'a fixed sum of money, based on pre-estimated amount of loss, on the happening of a covered event'.
Q24MCQ · 1 markMediumRequirements of Insurable Risk
A stock market investment, which carries the possibility of both gain and loss, is generally considered uninsurable. This is primarily because it violates which requirement of an insurable risk?
ALarge number of exposure units
BInsurable Interest
CAccidental and unintentional
✓No prospect of gain or profit
💡 The text states that a characteristic of insurable risk is that it does not involve any prospect of gain or profit; it must be a pure risk with only the possibility of full or partial loss. Speculative risks like stock market investments, which can result in both gain and loss, are not insurable.
Based on Example 2 (King's employees), the king has 500 employees. Two employees are expected to die during the year. If the king decided to increase the sum assured to Rs. 30,00,000 per employee for those who die, and assuming the same probability of 2 deaths, what would be the new premium amount per employee if the king still wants to cover the entire loss through the 500 employees' contributions?
ARs. 8,000
✓Rs. 12,000
CRs. 16,000
DRs. 20,000
💡 The new sum assured per employee is Rs. 30,00,000. With 2 expected deaths, the total loss to be covered would be Rs. 30,00,000 * 2 = Rs. 60,00,000. If this total loss is to be covered by 500 employees, the new premium amount per employee would be Rs. 60,00,000 / 500 = Rs. 12,000.
Q26MCQ · 1 markEasyRequirements of an Insurable Risk
According to the text, which of the following is an exception to the requirement that an insurable loss must be accidental, unintentional, and uncertain?
ALoss of income due to critical illness.
BDamage to property due to fire.
✓Death of an individual in a life insurance policy.
DFinancial loss due to market speculation.
💡 The text states: 'Loss must be accidental, unintentional and uncertain. The only exception is life insurance where the event being insured against, namely death, is certain. However, the time of death is uncertain, which makes it insurable.'
Q27MCQ · 1 markMediumPremium Calculation
Based on Example 1 (Merchant Ships), if only 50 out of the 100 merchants agreed to pay the premium, and the total loss suffered by all merchants remained Rs. 20,00,000 from 2 ships being lost, what would be the premium amount each of the participating merchants would have to pay to cover the total loss?
ARs. 10,000
BRs. 20,000
✓Rs. 40,000
DRs. 50,000
💡 According to the text, the total loss suffered by all merchants together was Rs. 20,00,000. If only 50 merchants agree to pay the premium, the total loss must be covered by these 50 merchants. Therefore, the premium per participating merchant would be Rs. 20,00,000 / 50 = Rs. 40,000.
Q28MCQ · 1 markMediumFundamental Principles of Insurance
An individual applies for a life insurance policy but intentionally fails to disclose a significant family history of a critical genetic ailment. If a claim arises later, based on the principle of Utmost Good Faith (Uberrimae Fidei), what action can the insurer take?
AThe insurer must pay the claim but can increase future premiums.
✓The insurer has the right to reject the claim entirely due to breach of good faith.
CThe insurer will pay a reduced claim amount proportional to the undisclosed risk.
DThe insurer can only reject the claim if the ailment directly caused the death.
💡 The chapter explains that if the insured fails to disclose relevant information truthfully, they are in breach of good faith. In such a scenario, 'when a claim comes up, investigation by the insurer may throw up the facts about the information that were suppressed. Based on that, the insurer has the right to reject the claim entirely.'
Q29MCQ · 1 markHardInsurable Interest
Mr. Kapoor is considering taking out an insurance policy. Based on the chapter's explanation of 'Insurable Interest', which of the following situations would typically NOT satisfy this requirement?
AMr. Kapoor insuring his own life, as his spouse and children are financially dependent on him.
BA bank insuring the life of a borrower to the extent of the outstanding loan amount.
✓Mr. Kapoor taking out a policy on the life of his distant cousin, who is not financially dependent on him and lives in another country.
DA business owner insuring their inventory against theft, as its loss would result in financial damage to the business.
💡 The chapter states that 'In other blood relationships, such as aunts and uncles, cousins, nieces, and nephews, the insurable interest would not exist unless there is a proof of financial dependence.' In this scenario, the distant cousin is not financially dependent on Mr. Kapoor, thus failing the test of insurable interest.
Q30MCQ · 1 markEasyBasics of Insurance - Examples
Based on Example 1 (Merchant Ships), what was the total loss suffered by all merchants together each month, and what was the premium amount each merchant had to pay if all 100 merchants participated in the insurance fund?
ATotal loss Rs. 10,00,000; Premium Rs. 10,000
✓Total loss Rs. 20,00,000; Premium Rs. 20,000
CTotal loss Rs. 20,00,000; Premium Rs. 40,000
DTotal loss Rs. 10,00,000; Premium Rs. 20,000
💡 According to Example 1, 2 ships were lost at sea on average each month, and the loss per ship was Rs. 10,00,000. Therefore, the total loss suffered by all merchants together was Rs. 10,00,000 * 2 = Rs. 20,00,000.
If all 100 merchants participated, the total fund needed was Rs. 20,00,000. So, the premium amount each merchant had to pay was Rs. 20,00,000 / 100 merchants = Rs. 20,000.
Q31MCQ · 1 markHardConcepts in Insurance
A critical illness policy that pays a fixed sum of money upon diagnosis of a covered illness, regardless of the actual medical expenses incurred, would be categorized as which type of insurance policy according to the provided text?
AIndemnity Insurance, because it covers a specific loss event.
✓Benefit Insurance, because the exact loss of future income due to critical illness is difficult to ascertain.
CIndemnity Insurance, because it aims to restore the financial situation to its pre-loss state.
DBenefit Insurance, because it involves a predetermined payout which is typically smaller than the actual loss.
💡 The text defines Benefit Insurance as a plan where 'a fixed sum of money, based on pre-estimated amount of loss, is paid on the happening of a covered event.' It specifically uses 'critical illness policy where again there is a loss of future income due to a critical illness but it is difficult to ascertain the exact loss caused due to this' as an example of a defined benefit plan. Options A and C describe Indemnity Insurance. Option D's reasoning is not the defining characteristic of Benefit Insurance from the text.
Q32MCQ · 1 markEasyFundamental Principles of Insurance
Which fundamental principle of insurance requires the insured to disclose all relevant information truthfully to the insurer, such as medical history and habits, due to the inherent information asymmetry between the parties?
APrinciple of Indemnity
BInsurable Interest
✓Utmost Good Faith (Uberrimae Fidei)
DLaw of Large Numbers
💡 The principle of Utmost Good Faith (Uberrimae Fidei) mandates that the insured must disclose all material information truthfully to the insurer, acknowledging that the insured typically has more information about the risk than the insurer.
Q33MCQ · 1 markEasyRequirements of Insurable Risk
Which of the following is an essential requirement for a risk to be insurable, as stated in the text?
AThe risk must involve a prospect of gain or profit for the insured.
BThe loss must be entirely predictable, with no uncertainty.
✓The individual seeking insurance must face financial loss in the event of the subject matter's destruction.
DThe premium payable must be equal to or higher than the value of the risk covered.
💡 The text states under 'Insurable Interest' that 'Insurable interest implies that the individual seeking insurance will face financial loss in the event of loss or destruction of the subject matter of insurance.' Option A is incorrect because insurable risk must have 'No prospect of gain or profit.' Option B is incorrect because loss must be 'accidental, unintentional and uncertain.' Option D is incorrect because 'Premium must be economically feasible' and 'far less than the value of the risk covered.'
Q34MCQ · 1 markEasyBasics of Insurance - Premium Calculation
In the King's employees example, the king devised a scheme where he contributed an additional Rs. 8,000 per employee into an insurance fund. Given that each employee earned Rs. 2 lakhs per year, what percentage of an employee's annual salary did the king contribute as a premium?
A2%
✓4%
C8%
D10%
💡 The annual salary of each employee is Rs. 2,00,000. The premium contributed per employee is Rs. 8,000. Percentage contribution = (Premium / Annual Salary) * 100 = (Rs. 8,000 / Rs. 2,00,000) * 100 = 0.04 * 100 = 4%.
Q35MCQ · 1 markEasyConcepts in Insurance
Which type of insurance policy is characterized by paying a fixed sum of money based on a pre-estimated amount of loss, without trying to ascertain the exact actual loss caused, especially when such exact loss is difficult to determine?
AIndemnity Insurance
BProperty Insurance
✓Benefit Insurance
DMarine Insurance
💡 The text defines 'Benefit Insurance' (or defined benefit insurance plan) as one where 'a fixed sum of money, based on pre-estimated amount of loss, is paid on the happening of a covered event,' particularly when 'it is difficult to ascertain the exact actual loss caused'. Life insurance is given as a prime example.
Case-Based Questions (1 sets)
Case 1Case-Based · 1 mark eachBasics of Insurance - Risk Management & Premium Calculation
Mr. Sharma, a Certified Financial Planner, is advising the "Prosperity Farmers' Cooperative," a group of 200 small-scale farmers in rural Rajasthan. These farmers primarily cultivate a unique variety of mustard, which is particularly vulnerable to a specific fungal blight. Historical records from the past five years indicate that, on average, 8 farmers within the cooperative suffer a complete crop loss annually due to this blight. The average financial loss incurred by each affected farmer is estimated at Rs. 1,50,000.
To mitigate this recurring risk, Mr. Sharma proposes a collective insurance scheme. Under this scheme, all 200 farmers would contribute an annual premium to a central fund. This fund would then be used to compensate the farmers who experience crop loss due to the fungal blight. Mr. Sharma estimates that the annual operational and administrative costs for managing this collective fund would be Rs. 2,00,000.
During a meeting, a few farmers express concerns. Mr. Gopal, a relatively new farmer, questions the necessity of his contribution, stating he has never experienced a loss and fears "wasting" his premium. Mr. Ramesh, a senior farmer, suggests that instead of all 200 participating, only 100 farmers from the most blight-prone areas should contribute, arguing it would lower the individual premium for them. Mr. Sharma carefully explains the implications of these suggestions based on fundamental insurance principles.
Medium Sub-question 1
If, contrary to Mr. Sharma's advice, only 100 farmers (from the most blight-prone areas, but still with the same average loss probability across the total 200) decide to participate in the scheme, what would be the annual premium per participating farmer? Assume the total expected loss (8 farmers * Rs. 1,50,000) and administrative costs remain the same for the pool.
ARs. 10,000
BRs. 12,000
✓Rs. 14,000
DRs. 16,000
💡 1. Calculate Total Expected Loss:
Total Expected Loss = 8 * Rs. 1,50,000 = Rs. 12,00,000 (as per the case context).
2. Calculate Total Annual Costs for the Fund:
Total Expected Loss = Rs. 12,00,000
Administrative Costs = Rs. 2,00,000
Total Annual Costs = Rs. 12,00,000 + Rs. 2,00,000 = Rs. 14,00,000
3. Calculate Annual Premium per Participating Farmer:
Total Annual Costs = Rs. 14,00,000
Number of Participating Farmers = 100
Annual Premium per Farmer = Rs. 14,00,000 / 100 = Rs. 14,000
This increased premium per farmer (from Rs. 7,000 to Rs. 14,000) illustrates the 'Law of Large Numbers', where a smaller pool of participants requires a higher individual contribution to cover the same aggregate expected loss and fixed administrative costs.
Medium Sub-question 2
The fungal blight risk faced by the farmers is considered insurable primarily because it meets several requirements. Which of the following is NOT a characteristic making this risk insurable, based on the chapter text?
AThe chance of loss is calculable based on historical data.
BThe loss is accidental and unintentional from the farmer's perspective.
CFarmers have an insurable interest in their crops.
✓The risk offers a prospect of significant gain or profit if the blight does not occur.
💡 According to the chapter text ('No prospect of gain or profit'), a fundamental requirement for an insurable risk is that it must be a pure risk, involving only the possibility of loss or no loss, not a gain. Insurance aims to restore the financial position, not to create profit. Options A, B, and C are all valid characteristics of an insurable risk as per the chapter: 'Chance of loss must be calculable', 'Accidental and unintentional', and 'Insurable Interest'.
Easy Sub-question 3
Mr. Gopal's concern about "wasting" his premium if he doesn't suffer a loss directly relates to which fundamental concept of insurance mentioned in the chapter?
APrinciple of Indemnity
BRisk Retention
✓Risk Transfer and Pooling
DUtmost Good Faith
💡 Mr. Gopal's concern highlights the essence of insurance as a mechanism for 'Risk Transfer and Pooling'. Individuals contribute to a common fund (pooling) to transfer their individual risk of a large, uncertain loss to the group. While some may not suffer a loss and thus not claim, their premium contributes to covering the losses of others, ensuring that everyone is protected. This is directly analogous to the example of merchants not wanting to 'waste' premiums in the chapter text.
Easy Sub-question 4
What would be the annual premium payable by each of the 200 farmers if the cooperative decides to implement Mr. Sharma's proposed scheme covering all members?
ARs. 6,000
✓Rs. 7,000
CRs. 8,500
DRs. 9,500
💡 1. Calculate Total Expected Loss:
Number of farmers affected annually = 8
Average financial loss per farmer = Rs. 1,50,000
Total Expected Loss = 8 * Rs. 1,50,000 = Rs. 12,00,000
2. Calculate Total Annual Costs for the Fund:
Total Expected Loss = Rs. 12,00,000
Administrative Costs = Rs. 2,00,000
Total Annual Costs = Rs. 12,00,000 + Rs. 2,00,000 = Rs. 14,00,000
3. Calculate Annual Premium per Farmer:
Total Annual Costs = Rs. 14,00,000
Total Number of Participating Farmers = 200
Annual Premium per Farmer = Rs. 14,00,000 / 200 = Rs. 7,000
Hard Sub-question 5
The cooperative implements the scheme for all 200 farmers as initially proposed by Mr. Sharma. In a particular year, 10 farmers suffer crop loss due to the blight. Due to increased market prices, the verifiable loss for each of these 10 farmers is Rs. 1,60,000. If the collective scheme operates strictly on the 'Principle of Indemnity', what would be the total payout from the fund to these 10 farmers, and what would be the surplus or deficit in the fund for that year, assuming only the initial premiums were collected?
APayout: Rs. 15,00,000; Deficit: Rs. 1,00,000
✓Payout: Rs. 16,00,000; Deficit: Rs. 2,00,000
CPayout: Rs. 16,00,000; Surplus: Rs. 0
DPayout: Rs. 14,00,000; Surplus: Rs. 0
💡 1. Calculate Total Premiums Collected:
From Q1, the annual premium per farmer is Rs. 7,000.
Total premiums collected = 200 farmers * Rs. 7,000/farmer = Rs. 14,00,000.
2. Calculate Total Payout under Principle of Indemnity:
The 'Principle of Indemnity' implies that insurance will restore the financial situation of the insured to where it was before the event that caused the loss or damage. It covers the actual verifiable loss.
Total payout = Number of affected farmers * Actual verifiable loss per farmer = 10 * Rs. 1,60,000 = Rs. 16,00,000.
3. Calculate Surplus or Deficit in the Fund:
The fund's balance is calculated by comparing the total premiums collected with the total payouts (which includes the administrative costs as part of the total premium collected).
Fund Balance = Total Premiums Collected - Total Payout = Rs. 14,00,000 - Rs. 16,00,000 = -Rs. 2,00,000.
This indicates a deficit of Rs. 2,00,000 for the year, as the actual claims exceeded the total funds collected, even though the premium calculation included a provision for administrative costs and expected claims.
About this content: These practice questions are based on the
NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination Workbook
published by the National Institute of Securities Markets (NISM), Mumbai.
NISM is a SEBI-established institution. Questions cover Basics of Insurance with verified answers and explanations.
BullWiser is an independent exam preparation platform — not affiliated with NISM or SEBI.
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