Insurance Contracts, Law and Regulation

Introduction

Insurance converts uncertain financial loss into a contractual obligation undertaken by an insurer in return for premium. The policy is therefore more than a commercial document: it is a legally enforceable allocation of risk shaped by contract law, insurance doctrine, consumer protection, prudential regulation and market-conduct rules.

The legal details vary among jurisdictions. This chapter explains widely recognised principles derived largely from common-law insurance systems while identifying areas in which statutes may modify traditional rules. Practitioners must always consult the legislation, policy wording and regulatory guidance applicable to the contract.

Learning Objectives

After studying this chapter, students should be able to:

1. Explain the formation and interpretation of insurance contracts.
2. Apply utmost good faith, disclosure and misrepresentation principles.
3. Distinguish insurable interest in life and general insurance.
4. Apply indemnity, contribution, subrogation and proximate-cause principles.
5. Analyse policy terms, exclusions, warranties and claims obligations.
6. Evaluate consumer-protection, licensing and regulatory-supervision mechanisms.
7. Recognise legal and ethical issues arising from digital distribution and artificial intelligence.

1. The Nature of an Insurance Contract

An insurance contract is an agreement under which an insurer promises specified benefits if an uncertain insured event occurs, in exchange for premium or a legally sufficient promise to pay premium.

Insurance contracts commonly possess several distinctive characteristics:

• Aleatory: the parties’ performances depend on an uncertain event and may be unequal in monetary value.
• Conditional: payment depends on compliance with policy conditions and proof that a covered event occurred.
• Personal: the insurer generally assesses the risk presented by a particular proposer; a policy cannot always be transferred freely.
• Adhesive or standard-form: the insurer usually drafts the wording. Ambiguities may consequently be interpreted against the drafter under the doctrine of contra proferentem, especially where consumer wording is unclear.
• Relational: duties may continue through proposal, underwriting, policy administration and claims settlement.

General insurance commonly indemnifies loss to property, liability or financial interests. Life insurance usually promises an agreed sum following death, survival or another specified contingency. It is not ordinarily a contract of indemnity because the economic value of human life cannot be measured through an ordinary post-loss valuation.

2. Formation of the Policy

2.1 Core contractual requirements

A valid insurance contract generally requires:

1. Offer and acceptance: a proposal may constitute an offer, although in some transactions the insurer’s quotation is the offer. Acceptance must correspond to the offer.
2. Consideration: the policyholder provides premium or a promise to pay it; the insurer promises covered benefits.
3. Intention to create legal relations: commercial insurance arrangements normally satisfy this requirement.
4. Capacity: parties must possess legal capacity. Special rules may protect minors or persons lacking decision-making capacity.
5. Legality: an agreement covering an unlawful interest or designed to facilitate illegality may be unenforceable.
6. Certainty: the subject matter, period, risks, limits and parties must be sufficiently ascertainable.

Payment of premium is not universally a prerequisite to contract formation. It may instead be a contractual condition of commencement or continuation. The policy wording and local law determine the result.

2.2 Proposal, quotation and acceptance

A typical formation process is:

Figure: A common policy-formation sequence; actual formation depends on the legal effect of each communication.

A cover note or temporary certificate may provide immediate protection while the full policy is prepared. Electronic acceptance can form a contract where electronic-transactions law recognises it and the customer receives adequate notice of the terms.

2.3 Intermediaries and authority

Agents, brokers and digital platforms may participate in formation. Their legal status matters:

• An insurer’s agent may bind the insurer within actual or apparent authority.
• A broker usually represents the customer when seeking suitable insurance, although the broker may perform specified functions for an insurer.
• An apparent authority issue arises where the insurer’s conduct reasonably leads a customer to believe that an intermediary has authority.

Who received a disclosure, collected premium or issued a representation may determine whether knowledge and liability are attributed to the insurer.

3. Policy Structure and Interpretation

A policy typically contains:

Interpretation seeks the objective meaning of the contract as a whole, in its commercial and legal context. Courts generally do not create coverage merely because an insured expected it. However, unclear standard wording may be interpreted against the insurer, and unfair-terms legislation may invalidate terms that create prohibited imbalance or lack transparency.

A condition precedent to liability requires compliance before the insurer becomes liable for a claim, subject to statutory restrictions. A warranty traditionally demanded strict compliance in some legal systems, but modern reforms often require a connection between breach and loss or suspend liability only while the breach continues. Labels are not always decisive; legal effect depends on wording and governing law.

4. Utmost Good Faith, Disclosure and Misrepresentation

4.1 Rationale

Insurance underwriting depends on information that is often more accessible to the proposer than to the insurer. The doctrine of utmost good faith—traditionally expressed as uberrimae fidei—requires honesty and appropriate disclosure. Modern law increasingly replaces an unlimited general duty with defined statutory duties and proportionate remedies.

4.2 Material facts

A fact is commonly material if it would influence the judgment of a prudent insurer in deciding whether to accept the risk or on what terms. Examples include:

• previous losses;
• dangerous use of property;
• serious health history relevant to life underwriting;
• unusual storage of hazardous materials;
• prior policy cancellation or fraud, where legally relevant.

Applicants should answer questions accurately and avoid misleading half-truths. Insurers should ask clear, specific questions rather than relying on vague requests for “all material facts.” Consumer regimes may require only reasonable care not to make a misrepresentation, while commercial insureds may owe a broader duty of fair presentation.

Disclosure is generally unnecessary for facts that the insurer knows, ought to know in the ordinary course of business, has waived, or that reduce the risk—subject to local law.

4.3 Types of breach and remedies

A misrepresentation may be:

• Fraudulent: made knowingly, without belief in its truth, or recklessly.
• Negligent or careless: made without legally required care.
• Innocent: made despite reasonable care.

Traditional law frequently allowed avoidance ab initio, treating the contract as if it had never existed. This could be disproportionately harsh. Modern statutes in many jurisdictions distinguish deliberate breaches from careless ones and may permit:

• avoidance for deliberate or reckless breach;
• application of terms the insurer would have imposed;
• reduction of a claim in proportion to the premium actually charged relative to the premium that should have been charged;
• no remedy where the insurer would have contracted on the same terms.

Where a statute authorises a premium-based proportionate remedy, the reduced claim may be calculated as:

This formula applies only where the governing law expressly adopts that remedy, both premiums relate to the same risk and coverage period, and no different remedy—such as avoidance or amended terms—applies.

Example: An insurer charged 900 currency units but proves that it would have charged 1,200 had a careless misrepresentation not occurred. If the otherwise covered claim is 80,000, the statutory proportionate payment is:

This is not a universal claims formula; it is a jurisdiction-dependent legal remedy.

4.4 Continuing duties

Disclosure is most important before formation and renewal, but a policy may also require notification of material alterations during the period—for example, conversion of a warehouse into a chemical-processing facility. Claims presentation independently requires honesty. A fraudulent claim may result in forfeiture, termination and possible civil or criminal consequences.

5. Insurable Interest

Insurable interest is a legally recognised relationship with the insured life, property or liability such that the policyholder benefits from preservation or may suffer loss from the insured event. It separates legitimate insurance from wagering and reduces moral hazard.

5.1 General insurance

A person may have an insurable interest through ownership, possession, contractual responsibility, potential legal liability, a security interest or another recognised economic relationship. Owner, tenant, mortgagee and secured lender may each possess distinct interests in the same property.

The required timing varies by class and jurisdiction. In many property contexts, the interest must exist when the loss occurs; some regimes also require it at inception. Marine and other specialised insurance may have statutory timing rules.

5.2 Life insurance

A person ordinarily has unlimited insurable interest in their own life. Interests in another person’s life may arise through close family relationships recognised by law, dependency, debt or commercial exposure, such as a company’s interest in a key employee.

Life-insurance interest is commonly required at policy inception rather than at death. A validly issued policy may therefore remain effective after the original relationship ends, although assignment, beneficiary and anti-wagering rules still apply.

6. Indemnity

Indemnity seeks to restore the insured, as nearly as money can, to the financial position immediately before the covered loss—without allowing profit from misfortune.

For measurable property damage, the direct economic loss may be represented conceptually as:

Both values must use a consistent valuation basis and currency. Actual settlement is also affected by policy limits, deductibles, exclusions, depreciation, reinstatement provisions and underinsurance clauses.

A simplified settlement relationship is:

This expression assumes no coinsurance, average clause, sublimit, contribution, salvage, fraud or other adjustment.

6.1 Methods of indemnification

An insurer may indemnify through cash payment, repair, replacement or reinstatement. Replacement-cost insurance may pay the cost of replacing damaged property without depreciation if policy conditions are met. Agreed-value policies fix an amount in advance, but payment remains subject to their terms and applicable law.

6.2 Underinsurance and average

Some policies contain an average or coinsurance clause. In its common proportional form:

The formula applies only when the policy contains such a clause, the sum insured is below the required amount, and all amounts use the same valuation basis and date. Payment remains subject to the policy limit and other terms.

Example: Property that should be insured for 1,000,000 is insured for 600,000. A covered partial loss is 200,000. Before any deductible:

The policyholder bears the remaining 80,000, subject to the precise wording.

Life policies, personal accident fixed benefits and many parametric policies are not conventional contracts of indemnity. They pay an agreed amount when the specified trigger occurs.

7. Contribution

Contribution prevents an insured from recovering more than the indemnifiable loss where two or more policies cover the same interest, subject matter, peril and period. One insurer that pays more than its proper share may seek contribution from another liable insurer.

For a simple pro-rata-by-limits allocation:

where:

• C_i = insurer i’s contribution, in currency units;
• S_i = insurer i’s applicable policy limit;
• ∑S = total applicable limits of all contributing policies;
• L = common indemnifiable loss allocated among those policies.

This special-case formula is valid only where 0 ≤ L ≤ ∑S, so no calculated share exceeds its applicable limit. It also assumes all policies are valid and collectible; cover the same interest, subject matter, peril and layer; use the same allocation basis; and contain no controlling excess, escape, non-contribution or other-insurance provision. The loss L must already reflect any common agreed adjustment. Policy-specific deductibles, sublimits, caps, exhaustion, differing valuation bases or priority provisions require policy-by-policy analysis and may make this formula inappropriate.

Worked example: A covered loss of 600,000 is insured by Policy A with an applicable limit of 800,000 and Policy B with an applicable limit of 400,000. Assume no deductibles, sublimits or conflicting other-insurance clauses, and both policies cover the same risk on the same basis.

Here, ∑S = 1,200,000 and L = 600,000 ≤ 1,200,000. Therefore:

The total is 600,000, and neither share exceeds its policy limit. If the covered loss exceeded the combined limits, this proportional expression could not allocate the entire loss without breaching limits; each insurer’s payment would instead be capped according to its contract and applicable priority rules.

Contribution generally does not apply to ordinary life policies because they promise fixed benefits rather than indemnity.

8. Subrogation

After indemnifying the insured, an insurer may acquire the insured’s rights against a third party responsible for the loss. Subrogation supports indemnity by preventing double recovery and placing the ultimate burden on the wrongdoer.

For example, if defective electrical work causes a covered fire, the property insurer may pay the insured and pursue the negligent contractor. The insurer cannot normally obtain greater rights than the insured possessed. A valid defence against the insured is generally also available against the insurer.

Important limitations include:

• recovery is limited by the rights transferred under law and contract;
• the insured must not prejudice those rights, such as by releasing the wrongdoer without consent;
• the insurer ordinarily cannot subrogate against its own insured for the covered risk;
• allocation of recovery, legal costs and uninsured loss depends on policy wording and local priority rules.

Salvage is related but distinct: the insurer may obtain rights in damaged property after settling a total loss, subject to the policy and law.

9. Proximate Cause

When several events contribute to loss, the proximate-cause doctrine identifies the legally effective cause. Proximate cause is not necessarily the first, last or nearest event in time. It is the dominant, operative cause determined through common sense and the policy’s wording.

A practical analysis asks:

1. What events formed the causal sequence?
2. Was the sequence continuous or interrupted by a new independent cause?
3. Which cause was dominant and effective?
4. Is that cause insured, excluded or uninsured?
5. Do anti-concurrent-causation wording or statutes alter the result?

Suppose a covered storm damages a roof, allowing rain to enter immediately and damage stock. If no independent event interrupts the sequence, the storm may be the proximate cause. If an owner later deliberately leaves undamaged goods outdoors, that independent act may create a separate causal question.

Where concurrent independent causes operate, coverage outcomes vary. Some legal systems allow recovery if one effective cause is insured and no effective cause is excluded; an effective excluded cause may defeat the claim. Precise wording and jurisdiction are decisive.

10. Claims Handling and Consumer Protection

A policyholder should give timely notice, take reasonable steps to mitigate loss, preserve evidence and submit required information. Failure does not always defeat a claim; modern law may require the insurer to show prejudice or apply a proportionate remedy.

A sound claims process includes:

1. registration and acknowledgement;
2. verification of policy status and claimant identity;
3. investigation of cause, quantum and possible fraud;
4. reservation of rights where coverage is uncertain;
5. a reasoned coverage decision;
6. prompt payment of undisputed amounts;
7. complaint and external-review information.

Consumer protection commonly requires transparent disclosure, fair product design, suitability or demands-and-needs assessment, reasonable claims service, privacy protection and accessible complaints procedures. Regulators may prohibit misleading advertising, unfair discrimination, hidden exclusions and unreasonable claims delay.

Treating customers fairly does not require payment of uncovered claims. It requires clear communication, consistent reasoning, avoidance of conflicts and decisions supported by evidence and policy wording.

11. Licensing and Regulatory Supervision

Insurance regulation addresses two broad risks:

• Prudential risk: the insurer may lack resources to meet obligations.
• Conduct risk: customers may be treated unfairly even when the insurer remains solvent.

11.1 Licensing

Insurers generally require authorisation for specified classes of business. Licensing may assess ownership, governance, capital, business plans, management fitness, risk systems and reinsurance. Agents, brokers, loss assessors and other intermediaries may require separate licensing, registration or professional qualification.

Operating without the required licence can attract penalties and may affect contractual or compensation rights, depending on local law.

11.2 Prudential supervision

Prudential regulators typically supervise:

• minimum and risk-based capital;
• technical provisions or policy liabilities;
• asset quality and asset–liability matching;
• reinsurance and concentration risk;
• liquidity and stress testing;
• governance, actuarial functions and internal controls;
• recovery and resolution planning.

A simplified solvency ratio is:

Both numerator and denominator are monetary amounts measured under the same regulatory framework, making the ratio dimensionless. A ratio of 1.25 means eligible own funds equal 125% of the requirement. It does not, by itself, prove that an insurer is safe; asset quality, model risk, liquidity and emerging losses also matter.

11.3 Market-conduct supervision

Conduct supervisors may review product governance, sales incentives, commissions, policy wording, premium practices, claims outcomes, complaints and vulnerable-customer treatment. Supervisory tools include reporting, inspections, thematic reviews, remediation orders, fines, licence restrictions and management disqualification.

Policyholder-protection or guarantee schemes may compensate eligible claimants when an insurer fails. Such schemes usually have eligibility rules, coverage limits and funding arrangements; they do not eliminate the need for prudential supervision.

11.4 Financial crime and data governance

Insurers and intermediaries may be subject to anti-money-laundering, counter-terrorist-financing, sanctions and customer-identification duties. Life policies with surrender or investment features can be particularly exposed to financial crime.

Health, biometric and behavioural data require strong privacy controls. Lawful collection does not automatically justify every use: purpose limitation, security, retention and fair automated processing remain essential.

12. Technology, Artificial Intelligence and Contemporary Developments

Digital distribution can reduce cost and improve access, but customers must receive important terms before contracting. Pre-ticked answers, dark patterns and unreadable mobile disclosures may undermine meaningful consent.

Artificial intelligence is used in underwriting, fraud detection and claims triage. Governance should address:

• data quality and representativeness;
• unlawful proxy discrimination;
• explainability appropriate to the decision;
• human review of high-impact outcomes;
• cybersecurity and model monitoring;
• records sufficient for audit and complaint resolution.

Risk classification is fundamental to insurance, but actuarial correlation alone does not make a factor legally or ethically acceptable. Protected characteristics, social fairness and access to essential insurance may constrain classification.

Parametric insurance pays an agreed amount when an objective index reaches a threshold. It can accelerate settlement but creates basis risk: the policyholder’s actual loss may differ from the index-based payment. Smart-contract automation does not remove legal questions concerning inaccurate data, defective code, disclosure or unfair terms.

Climate change is also reshaping underwriting, catastrophe modelling and affordability. Regulators increasingly expect scenario analysis, governance of climate-related financial risk and transparent treatment of customers in high-risk regions.

13. Illustrative Case: The Riverside Warehouse Claim

Background

This fictional case concerns Riverside Traders, which insured the same warehouse under two policies covering fire. Policy A had an applicable limit of 600,000 and Policy B a limit of 300,000. Assume both covered the same interest, period and layer, with no deductible, sublimit or conflicting other-insurance clause.

A fire caused an agreed indemnifiable loss of 540,000. Investigators concluded that faulty wiring installed by an electrical contractor was the dominant cause. The proposal had accurately disclosed the building’s age and electrical inspection history.

Problem

The insurers had to determine:

• whether disclosure had been adequate;
• whether fire was covered;
• how the loss should be allocated;
• whether recovery could be pursued against the contractor.

Analysis

The evidence showed no actionable misrepresentation. Faulty wiring led directly to fire, making fire the dominant operative cause. No relevant exclusion applied.

The combined applicable limits were 900,000, and 540,000 ≤ 900,000. Under the stated special-case contribution assumptions:

Both payments remain within their respective limits. After indemnifying Riverside, the insurers may exercise subrogation rights against the contractor, subject to proof of negligence, contractual limitations and local recovery-priority rules.

Approach and Outcome

The insurers coordinated investigation, accepted coverage, allocated 360,000 to Policy A and 180,000 to Policy B, and preserved evidence for a possible subrogation action. Riverside could not retain both full indemnity and a duplicate recovery from the contractor for the same loss.

Learning Points

The case demonstrates that coverage analysis should precede contribution. Disclosure, causation and exclusions determine whether each policy is collectible; contribution then allocates the indemnifiable loss. Subrogation operates after payment to transfer enforceable third-party rights without giving the insurer better rights than the insured had.

14. Professional Best Practices and Limitations

Insurance professionals should:

• document offer, acceptance and all material communications;
• ask specific underwriting questions and record reasons for decisions;
• explain significant exclusions, deductibles and renewal changes;
• distinguish fixed-benefit products from indemnity insurance;
• analyse each policy before applying contribution;
• preserve subrogation evidence without delaying valid payments unnecessarily;
• provide reasoned claim decisions and complaint routes;
• monitor automated models for accuracy, bias and regulatory compliance.

No doctrine should be applied mechanically. Statutes may replace common-law rules; policy wording may alter default allocation; and consumer remedies may differ from commercial remedies. Cross-border insurance adds conflict-of-laws, jurisdiction and regulatory-perimeter questions.

Chapter Summary

Insurance contracts allocate uncertain risk through legally enforceable promises. Formation requires agreement, consideration, capacity, legality and sufficient certainty, while intermediaries may affect attribution of knowledge and authority. Utmost good faith supports accurate disclosure, although modern law increasingly uses defined duties and proportionate remedies rather than automatic avoidance.

Insurable interest distinguishes insurance from wagering. Indemnity limits recovery to covered economic loss, while contribution allocates the same indemnifiable loss among insurers under appropriate conditions. Subrogation transfers third-party recovery rights after indemnification, and proximate cause identifies the dominant operative cause of loss. Life insurance differs because it generally provides agreed benefits rather than indemnity.

Regulation combines licensing, prudential supervision and market-conduct oversight. Capital, reserves, governance, product design, claims handling and consumer redress all contribute to market integrity. Digital distribution, AI, parametric products and climate risk create new opportunities but require transparent, fair and accountable governance.

Key Terms

Utmost good faith: The insurance-law obligation of honesty and legally required disclosure.

Material fact: A fact capable of influencing a prudent insurer’s underwriting judgment.

Misrepresentation: A false or misleading statement that may affect contractual remedies.

Insurable interest: A legally recognised relationship supporting legitimate insurance of a life, property or liability.

Indemnity: Restoration of the insured’s covered financial position without profit from loss.

Contribution: Allocation of an indemnifiable loss among multiple liable insurers.

Subrogation: Transfer to an indemnifying insurer of the insured’s rights against responsible third parties.

Proximate cause: The dominant, effective legal cause of a loss.

Deductible: The amount of a covered loss allocated to the insured before insurer payment.

Policy limit: The maximum amount payable under specified policy coverage.

Average clause: A provision proportionately reducing recovery where required insurance is not maintained.

Warranty: A contractual promise whose breach has consequences defined by policy wording and law.

Exclusion: A policy provision removing specified risks or circumstances from coverage.

Endorsement: A document modifying or supplementing standard policy terms.

Cover note: Temporary evidence of insurance pending issue of the full policy.

Contra proferentem: Interpretation of unresolved ambiguity against the party that drafted the wording.

Prudential supervision: Regulation directed at insurer solvency, governance and financial resilience.

Conduct risk: The risk that an insurer or intermediary causes unfair customer outcomes.

Basis risk: The difference between actual loss and payment determined by a parametric index.

Review Questions

Short Answer Questions

1. What characteristics distinguish an insurance contract from an ordinary sale contract?
2. Define a material fact in insurance underwriting.
3. Why is life insurance generally not a contract of indemnity?
4. What is the purpose of subrogation?
5. Distinguish prudential supervision from market-conduct supervision.

Long Answer Questions

1. Explain the legal stages involved in forming an insurance policy, including the role of intermediaries.
2. Critically discuss the evolution from avoidance for non-disclosure to proportionate remedies.
3. Compare insurable interest in life insurance and general insurance.
4. Explain indemnity, contribution and subrogation and analyse how they prevent overcompensation.
5. Evaluate the principal mechanisms used by regulators to protect policyholders and maintain insurer solvency.

Analytical / Application Questions

1. A property worth 2,000,000 is insured for 1,200,000 and suffers a covered loss of 500,000. Apply a proportional average clause, state the assumptions and calculate the claim before any deductible.
2. Two policies with applicable limits of 900,000 and 600,000 cover the same loss of 750,000. Determine their shares under valid pro-rata-by-limits assumptions and verify that the formula’s limit condition is satisfied.
3. Analyse a claim in which a covered storm and an excluded maintenance defect both contribute to roof damage. Identify the evidence and policy provisions needed before deciding coverage.

Multiple Choice Questions with Answers

Question 1

Which principle requires a legally recognised relationship between the policyholder and the insured life, property or liability?

A. Contribution

B. Insurable interest

C. Proximate cause

D. Subrogation

Correct Answer: B. Insurable interest

Question 2

A valid special-case pro-rata contribution formula requires which condition?

A. The loss must exceed every individual policy limit

B. The policies must insure different interests

C. The allocated loss must satisfy 0 ≤ L ≤ ∑S

D. Every policy must contain a different deductible

Correct Answer: C. The allocated loss must satisfy 0 ≤ L ≤ ∑S

Question 3

Two policies with limits of 800,000 and 400,000 cover the same indemnifiable loss of 600,000. Assuming valid pro-rata-by-limits conditions and no deductibles or caps, what is Policy B's share?

A. 150,000

B. 200,000

C. 300,000

D. 400,000

Correct Answer: B. 200,000

Question 4

What is the primary purpose of subrogation?

A. To allow duplicate recovery by the insured

B. To transfer the insurer's liabilities to a reinsurer

C. To permit an indemnifying insurer to pursue the insured's rights against a responsible third party

D. To increase the policy limit after a loss

Correct Answer: C. To permit an indemnifying insurer to pursue the insured's rights against a responsible third party

Question 5

Which statement best describes proximate cause?

A. It is always the event nearest in time to the loss

B. It is the dominant and effective legal cause of the loss

C. It is always the first event in a causal sequence

D. It is the most expensive event in the sequence

Correct Answer: B. It is the dominant and effective legal cause of the loss

Question 6

Property required to be insured for 1,000,000 is insured for 600,000 and suffers a covered loss of 200,000. Under a proportional average clause, what is the claim before deductible?

A. 80,000

B. 120,000

C. 160,000

D. 200,000

Correct Answer: B. 120,000

Question 7

Why does contribution generally not apply to ordinary life insurance policies?

A. Life insurers are exempt from contract law

B. Life policies cannot name beneficiaries

C. Life policies normally promise fixed benefits rather than indemnity

D. Life policies never require insurable interest

Correct Answer: C. Life policies normally promise fixed benefits rather than indemnity

Question 8

Which regulatory activity is primarily prudential rather than market-conduct supervision?

A. Reviewing solvency capital and technical provisions

B. Assessing whether advertising is misleading

C. Investigating an unfair sales incentive

D. Reviewing the clarity of complaint letters

Correct Answer: A. Reviewing solvency capital and technical provisions

Question 9

An insurer has eligible own funds of 250 million and a regulatory capital requirement of 200 million. What is its simplified solvency ratio?

A. 0.80 or 80%

B. 1.00 or 100%

C. 1.20 or 120%

D. 1.25 or 125%

Correct Answer: D. 1.25 or 125%

Question 10

What risk arises when a parametric insurance payment differs from the policyholder's actual loss?

A. Basis risk

B. Liquidity risk

C. Contribution risk

D. Salvage risk

Correct Answer: A. Basis risk