Commerce
Question bank
Chapter 2
Section A
1
Insurance
Short questions
Explain the following terms:
(a)
Pooling risks
(2 marks)
People contribute money to insurance compaines (1) so that those who suffer a loss
are compensated (1).
(b)
Transferring risk
(2 marks)
Transferring risk means that the risk of suffering a loss is transferred to a third person
to bear with (1). For example, the owner of a plastic factory buys fire insurance, so,
when fire does occur, it is the insurance company which suffers a loss instead of the
owner of the factory (1).
2
Briefly describe two liability insurances in Hong Kong.
(4 marks)
Employer’s liability insurance (1): It means that employers are liable to compensate all
manual workers and non-manual workers if they receive injuries during the course of their
work (1).
‘Third party only’ of Motor insurance (1): It covers the driver against claims from third
parties who have suffered from injury, death or damage to their property in an accident (1).
3
State the importance of insurance to businesses.
(6 marks)
Encourages risk taking (1): The availability of insurance enables business to protect
themselves against risks, so they will be more willing to undertake risky ventures. This leads
to more business activities (1).
Allows businesses to cope with unforeseen risks (1): Insurance allows firms to survive even
when unforeseen events occur (1).
A source of capital (1): As the premiums received by underwriters are invested in a variety of
assets such as shares and debentures, the investments of insurance companies are a major
source of capital for other business (1).
 Oxford University Press 2001
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Commerce
Question bank
Releases capital (1): Businesses usually set aside certain funds to deal with emergency
situations. With insurance, underwriters can cover these situations, so that these funds can be
released to finance other business operations (1).
4
In fire insurance, the insurance companies sometimes chooses not to compensate the insured
by cash.
(a)
What is ‘not to compensate the insured by cash’?
(2 marks)
It is a compensation method called replacement (1). That is to say, the insurance
company will replace the item which has been insured and destroyed by fire, instead
of paying cash to the insured (1).
(b)
Under what situation will an insurance company choose not to compensate the insured
by cash?
(2 marks)
The insurance company may have good connections with traders and can obtain goods
from them at wholesale prices. Therefore, it is cheaper to compensate the insured with
goods than with cash (1).
It helps discourage fraud by offering a replacement as an indemnity. (1)
5
Explain the role of following people.
(a)
An actuary
(2 marks)
A person who is employed by the insured (1) and specializes in calculating premiums
for insurance (1).
(b)
An arbitrator
(2 marks)
An independent middleman who is called upon by two parties, the insured and the
insurer (1), to settle a disagreement (1).
(c)
A claims assessor
(2 marks)
A person who is employed by the insured (1) to evaluate the value of the loss and to
recommend an amount for compensation (1).
 Oxford University Press 2001
2
Commerce
Question bank
Section B
1
Long questions (20% each, 17% for content, 3% for effective communication)
Mr Wong is the owner of a software company designing new computer games. Before making
an insurance plan, he discusses what are ‘insurable risks’ and ‘non-insurable risks’ with an
insurance broker.
(a)
Explain the terms ‘insurable risks’ and ‘non-insurable risks’
(2 marks)
Insurable risks are risks which insurance companies are willing to insure against (1).
Non-insurable risks are risks which insurance companies are unwilling to insure
against (1).
(b)
Identify and explain whether the following is an insurable risk or a non-insurable risk.
(i)
There is a senior designer in Mr Wong’s company. His design is well-received by
customers. Mr Wong wants to buy a life assurance for him.
(3 marks)
Insurable risk (1): The senior designer is an important staff in the company. If he dies,
the company will suffer heavy loss. Therefore, there is an insurable interest (1).
(ii)
There is a restaurant next to Mr Wong’s office. He is afraid that he will suffer losses if
there is a fire in the restaurant. Therefore, he wants to buy a fire insurance for the
restaurant.
(3 marks)
Non-insurable risk (1): The restaurant is not a property of Mr. Wong, so there is no
insurable interest (1).
(iii)
Mr Wong uses some of his profits to buy technological shares. He wants to insure the
risk of a fall in the prices of the shares.
(3 marks)
Non-insurable risk (1): A fall or rise in the prices of shares is unexpected.
Shareholders will get profits or losses from these speculation activities. The insurance
companies are unwilling to insure against the risk that may be impossible to estimate
their probability of occurrence (1).
(iv)
Mr Wong wants to buy employer’s liability insurance for all his employees. (3 marks)
Insurable risk (1): According to the Employees’ Compensation Ordinance, employers
are liable to compensate all manual workers and non-manual workers if they receive
injuries during the course of their work (1).
 Oxford University Press 2001
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Commerce
(v)
Question bank
Mr Wong finds that the stationery, paper, etc. in his office are being stolen. He wants
to buy theft insurance to insure against the loss of these properties in his office.
(3 marks)
Non-insurable risk (1): The loss of stationery and paper in offices are frequent and
common, and the amount of money involved is small (1).
2
(a)
Identify and explain whether the following people can claim compensation from the
public liability insurance.
(i)
A waiter of a restaurant was injured when serving a customer.
(2 marks)
The injured (the waiter of the restaurant) will not get compensation from the public
liability insurance (1). It is because he is not the third person (i.e. person apart from
the owner and the employee of the restaurant) (1).
(ii)
A person was injured by a steel bar when he went into a construction site without a
special purpose. At the entrance of the construction site, it was labelled ‘Private area,
no entry is allowed’.
(2 marks)
The injured (the person who collecting construction waste) will not get compensation
from the public liability insurance (1). It is because the construction site is a private
area and no entry of the third person is allowed. The injured should bear the risk
himself (1).
(iii)
During an interview, something fell down from the ceiling of the conference room.
Both the interviewer and the interviewee were injured in the accident.
(4 marks)
The interviewer, is the staff of the company. (1) He/she is not insured from the public
liability insurance. Therefore, he/she will not get compensation from this type of
insurance (1). However, the interviewee, is insured by the public liability insurance
since he is a third person of the company (1). Therefore, he/she can get compensation
(1).
(b)
Ming Cheung is a container truck driver of Man Man Transport Company. One day,
when he was driving, he parked his container truck by the side of a road and went to
the toilet nearby. When he came back after five minutes, he found that the container
truck had been stolen and the goods inside the container were also lost.
 Oxford University Press 2001
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Commerce
Question bank
Explain who are insured by the motor insurance in the above case.
(5 marks)
The owner of the container truck is insured (1) by the comprehensive insurance of the
motor insurance (1), as it covers loss of or damage to his vehicle (1). However, the
container and the goods in the container truck are not insured from motor insurance
(1). The owner of the goods will not get any compensation from the motor insurance
in this case (1).
(c)
When there was a fire in a warehouse, a truck parked beside the warehouse was also
caught in the fire. As a result, all stocks in the warehouse and some goods on the truck
were damaged. Explain whether all the losses, including the stocks in the warehouse
and the goods on the truck, are insured by fire insurance.
(4 marks)
Fire insurance covers losses to the premises (1) and their contents arising from fire (1).
Thus, the damage of the stocks in the warehouse will be compensated (1). However,
the damage of the goods on the truck will not get any compensation (1).
3
Mr Fong has bought a new flat recently. He got a mortgage on his new flat with a bank, and
the bank bought insurance for his flat in turn. After moving into the new flat, he bought a new
car. He bought insurance to cover $120,000 and $100,000 from Insurance Company A and B
respectively. He told the insurance companies that the cylinder capacity of his car is 1,600c.c.,
but actually, it was 1,650c.c. During insured period, the car was damaged in a traffic accident.
He used $10,000 repair his car. The market value of his car was $180,000 at that time.
(a)
Why did the bank, which granted Mr Fong a mortgage, buy insurance for his flat?
(4 marks)
The bank wanted to ensure that the value of the flat (1) (which was the property of the
bank (1)) would not fall in case of any accident, such as fire (1). The bank wanted to
make sure its interest was insured (1).
(b)
Was Mr Fong act against the principle of ‘utmost good faith’, as he did not give the
correct information of the cylinder capacity of his car? Explain your answer. (2 marks)
No (1). It is because a difference in 50c.c. of the cylinder capacity will not cause any
significant effect (1).
(c) (i) Under which principle will Insurance Company A and B make compensation to
Mr Fong? Explain your answers.
(5 marks)
Principle of contribution (1).
 Oxford University Press 2001
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Commerce
Question bank
Both Insurance Company A and B will only contribute partially (1) to the indemnity (1)
so that the total amount received by Mr Fong (1) covers the value of the loss suffered
(1).
(ii) Calculate the amount of compensation that Mr Fong can obtain from Insurance
Company A and B respectively?
(6 marks)
Amount of compensation from Insurance Company A:
$10,000 x $120,000/ (1) ($120,000 + $100,000) (1)
= $5,454.5 (1)
Amount of compensation from Insurance Company B:
$10,000 x $100,000/ (1) ($120,000 + $100,000) (1)
= $4,545.4 (1)
 Oxford University Press 2001
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