C11 Exam Dumps : Principles and Practice of Insurance

One of the fundamental principles of insurance rating is that thepremium charged must accurately reflect the level of riskbeing insured. This principle ensures fairness and financial stability: individuals or businesses presenting a higher probability of loss or greater potential severity must payhigher premiums, while lower-risk policyholders pay less. This is essential because insurers must collect sufficient funds to cover expected claims, expenses, and maintain solvency.

Option B describes the pooling of funds, which is part of how insurance works but does not address how premiums are determined.

Option C relates to the general purpose of insurance, not premium adequacy.

Option D loosely refers to indemnification, not rating methodology.

Therefore, the only statement that accurately reflects the idea that premiums must be commensurate with the risk isA.

To be insurable, a peril must befortuitous, measurable, and not within the direct control of the insured.Cybersecurity risksmeet these criteria, which is why insurers offercyber liability and data breach insurance. These policies cover hacking, ransomware, privacy breaches, and business interruption caused by cyber events.

Mismanagement (B) is uninsurable because it results from internal decision failure.

Under-capitalization (C) is a business failure, not a fortuitous peril.

Product obsolescence (D) is a predictable business cycle risk and cannot be insured.

Thus, the only insurable peril listed isA: Cybersecurity.

With a guaranteed replacement cost policy, the insurer agrees to pay the full cost of replacing the damaged or destroyed property (subject to conditions), even if that amount approaches or, in some forms, exceeds the stated limit. Here, the total replacement cost of the loss is $500,000.

However, some furniture is salvageable and valued at $4,000. Since Dominika elects to keep this salvage, she is effectively retaining part of the value of the damaged property. To maintain the principle of indemnity and avoid overpayment, the insurer deducts the salvage value from the total amount they would otherwise pay.

Step-by-step:

Replacement cost of loss: $500,000

Less salvage value retained by insured: $4,000

Subtotal: $496,000

Less deductible: $1,000

Net settlement: $495,000

Therefore, Dominika will recover $495,000, making Option A correct.