Canadian Accredited Insurance Broker (CAIB) Two Practice Exam

Which of the following is a reason for excluding flood or earthquake coverage?

1. These occurrences are well predicted

2. They are not common in most areas

3. They have the potential to be catastrophic

4. They can easily be mitigated

The correct answer is: They have the potential to be catastrophic

Flood and earthquake coverage is often excluded from standard insurance policies primarily due to the catastrophic potential of these events. Both types of disasters can result in extensive damage to properties, infrastructure, and even loss of life, leading to significant financial losses for insurers. Therefore, to protect themselves from the overwhelming claims that could arise from such unpredictable and severe events, insurance companies often choose to exclude these risks from their policies. While it may be true that certain areas experience these natural disasters less frequently, the uncommon nature of an event does not guarantee safety from severe impacts when they do occur. Predicting the timing and intensity of such disasters accurately is also a challenge, which adds to the risk and complicates underwriting. Mitigation measures exist, but they might not be effective in completely preventing the damage caused by extreme flooding or earthquakes. Therefore, the focus on their catastrophic potential is the primary reason why coverage for floods and earthquakes may not be included by default in insurance policies.