CAIB 1 Insurance Exam Prep
Practice Test

A. The insured must own the property outright with no liens or mortgages

B. The insured must stand to suffer a direct financial loss if the insured event occurs ✓

C. The insured must have lived at the property for at least one year

D. The insured must be a Canadian citizen or permanent resident

Correct — B. Insurable interest means the insured has a financial stake in the subject matter of the insurance such that they would suffer a monetary loss if it were damaged or destroyed. Ownership is one way to establish insurable interest, but it is not the only way — mortgagees, lessees, and others with financial exposure also qualify.

A. A physical hazard

B. A morale hazard

C. A moral hazard ✓

D. Speculative risk

Correct — C. Moral hazard refers to dishonest behaviour or intentional misrepresentation by an applicant or insured that increases the insurer's risk. Deliberately lying on an application to obtain better rates is a textbook example of moral hazard, as opposed to morale hazard which involves carelessness rather than fraud.

A. The most recent event in a chain of events leading to a loss

B. The dominant, most effective cause that sets other events in motion leading to the loss ✓

C. Any contributing factor that made the loss worse

D. The first event that occurred in a chain of events

Correct — B. Proximate cause is the dominant, efficient cause that sets in motion a chain of events leading to a loss. Insurers use proximate cause to determine whether a covered peril is responsible for the loss. It is not necessarily the last event in the chain or the most recent one.

A. The cost to repair or replace damaged property with new materials of like kind and quality

B. The original purchase price of the property at the time it was acquired

C. The replacement cost of the property minus accumulated depreciation ✓

D. The fair market value of the property as negotiated between buyer and seller

Correct — C. Actual cash value (ACV) is calculated as the replacement cost of the property at the time of loss minus accumulated depreciation for age and condition. It represents the current economic value of the item. Replacement cost coverage, by contrast, pays the full cost to repair or replace without deducting depreciation.

A. Commercial general liability insurance

B. Directors and officers liability insurance

C. Errors and omissions (professional liability) insurance ✓

D. Fidelity insurance

Correct — C. Errors and omissions (E&O) insurance, also called professional liability insurance, protects brokers against claims arising from their negligent acts, errors, or omissions in performing professional duties. Failing to gather material underwriting information from a client is a classic E&O scenario.

A. A fire that destroys a warehouse

B. The chance that a loss will occur

C. A condition that increases the likelihood or severity of a loss ✓

D. The financial impact of an uninsured loss

Correct — C. A hazard is a condition or circumstance that increases the probability or severity of a loss. Examples include faulty wiring (physical hazard) or dishonest behaviour (moral hazard). A hazard is distinct from a peril (the cause of loss) and from risk (the uncertainty of loss).

A. Contribution

B. Indemnity ✓

C. Subrogation

D. Salvage

Correct — B. The principle of indemnity prohibits the insured from profiting from a loss. After receiving payment from the insurer, the insured cannot also collect compensation from the responsible third party — that would place them in a better position than before the loss. Subrogation is the mechanism by which the insurer recovers funds from the third party.

A. Net premiums earned divided by total expenses

B. Incurred losses and loss adjustment expenses divided by earned premiums ✓

C. Total claims paid divided by total policies in force

D. Gross written premiums divided by total assets

Correct — B. The loss ratio measures the percentage of premiums consumed by claims and the expenses of handling those claims. It is calculated as (incurred losses + loss adjustment expenses) / earned premiums. A loss ratio below 100% means the insurer is paying out less in claims than it earns in premiums from that line of business.