Free CILA CH1 – Introduction to the Insurance Industry Practice Questions

Sample Practice Questions

Try these 10 sample questions from the CILA CH1 – Introduction to the Insurance Industry practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1Why does an uncertain future loss, rather than an event known to have already happened, fit the basic insurance concept of risk?

   1. A.Risk concerns a possible adverse outcome.Correct answer: A
   2. B.Risk concerns an agreed settlement value.
   3. C.Risk concerns an insurer's operating expense.
   4. D.Risk concerns a policy's maximum benefit.

   Explanation: The course book states: "Risk is a chance or possibility of danger, loss, injury or some other adverse outcome." The uncertainty of an adverse outcome defines risk. Settlement values, expenses and benefit limits describe other insurance matters.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 1.1, p. 8

2. 2A contractor offers to replace a roof for £9,000. The customer replies that they agree only if the price is £8,000. How should that reply be characterised?

   1. A.An acceptance on the original terms
   2. B.A counteroffer changing the proposed termsCorrect answer: B
   3. C.Consideration already paid to the contractor
   4. D.Performance completing the original agreement

   Explanation: The course book states: "The acceptance must be identical to the offer and must not try to introduce new terms." The changed price prevents acceptance on identical terms. The reply is neither payment nor completed performance.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 3.1, p. 21

3. 3Which body regulates conduct in the UK insurance market and publishes the Insurance: Conduct of Business sourcebook?

   1. A.The Financial Conduct AuthorityCorrect answer: A
   2. B.The Financial Ombudsman Service
   3. C.The Financial Services Compensation Scheme
   4. D.The Chartered Institute of Loss Adjusters

   Explanation: The source states: "The FCA regulates the Insurance market and their website has a section dedicated to the handling of insurance claims." The FCA's conduct framework includes ICOBS. FOS resolves complaints, FSCS protects eligible customers after failures, and CILA sets professional standards for members.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 13.1, p. 75

4. 4For property insurance, what does insurable interest concern?

   1. A.A legally recognised financial relationship with the propertyCorrect answer: A
   2. B.A personal preference for the property's style or appearance
   3. C.A prediction that the property's selling price will increase
   4. D.An insurer's calculation of the premium to charge for that property

   Explanation: The source states: "A policy document will show the physical property insured by the policy, but what is actually insured is the policyholder’s financial interest in that property." Insurable interest concerns the insured's legally recognised financial relationship, rather than aesthetic preference, speculative price prediction or premium comparison.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — Insurable Interest, The Principle, printed p. 35

5. 5Why is customer retention commercially valuable to an insurer when existing policyholders could renew?

   1. A.Renewal premiums are guaranteed to exceed all future claim payments.
   2. B.Acquiring a replacement customer costs less than retaining an existing one.
   3. C.Existing policies can be renewed without incurring further operating costs.
   4. D.Acquiring replacement customers can cost more than retaining existing ones.Correct answer: D

   Explanation: The source states: "Acquiring new customers is much more expensive than retaining existing ones." Retention avoids repeatedly incurring higher acquisition costs. It does not guarantee underwriting profit or eliminate operating expenses; the alternative reversing the cost relationship contradicts the material.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 11.7, p. 66

6. 6A claims team collects extensive information unrelated to assessing or administering a particular claim. Which data protection principle most directly requires limiting that collection?

   1. A.Data minimisationCorrect answer: A
   2. B.Storage limitation
   3. C.Data accuracy
   4. D.Accountability

   Explanation: The source states: "adequate, relevant and limited to what is necessary" Data minimisation concerns what information is necessary for the purpose. Storage limitation concerns retention; accuracy correctness; accountability demonstrating compliance.

   Reference: ICO: A guide to the data protection principles — Article 5(1)(c), What are the principles?

7. 7In the liability framework used in CH1, what is a tort?

   1. A.An agreement fixing an insurer's premium
   2. B.A punishment imposed for a criminal conviction
   3. C.A civil wrong capable of giving rise to liabilityCorrect answer: C
   4. D.An Act passed by Parliament governing a transaction

   Explanation: The source states: "A tort is a civil wrong." Tort is a basis of civil liability distinct from contract, criminal punishment and statute as a source of law.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 4.2, p. 28

8. 8A bakery pays an insurer to bear specified financial losses if a fire occurs. Which feature makes this an example of risk transfer?

   1. A.The fire becomes less likely to start.
   2. B.Another party agrees to take the risk.Correct answer: B
   3. C.The bakery eliminates its fire exposure.
   4. D.The bakery funds every loss from savings.

   Explanation: The course book states: "Risk transfer is about recognising a risk and then making arrangements with someone else to either take or share that risk." The insurer assumes the specified risk. Transfer differs from reducing fire likelihood, removing the exposure or retaining losses.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 1.2, p. 8

9. 9A proposed contract promises an extra £200 payment 'if business goes well', without defining that phrase. Which feature of an enforceable offer is in doubt?

   1. A.Whether its terms are sufficiently clearCorrect answer: A
   2. B.Whether its consideration is payable in money
   3. C.Whether its words appear in a signed document
   4. D.Whether its performance begins on the same day

   Explanation: The course book states: "The offer must be stated clearly and a vague statement will not be held by the Courts to be enforceable." The undefined condition makes the promise uncertain. Payment in money is permissible, and a signature or same-day performance is not a universal requirement.

   Reference: CILA CH1 Introduction to the Insurance Industry course book — section 3.1, p. 21

10. 10Which activity describes the Prudential Regulation Authority's focus when supervising insurers?

    1. A.Setting conduct standards for the handling of retail insurance complaints
    2. B.Making binding determinations on individual financial-services disputes
    3. C.Promoting insurers' safety and soundness and ability to meet obligationsCorrect answer: C
    4. D.Funding statutory compensation following the failure of an authorised insurer

    Explanation: The source states: "Our focus is to ensure that insurers are able to meet their obligations to policyholders" This is prudential supervision. Conduct standards concern the FCA, individual dispute determinations the FOS, and eligible failure compensation the FSCS.

    Reference: PRA approach to insurance supervision — paragraphs 14–15, printed p. 8