Companies take out insurance for many purposes. Fig. 5.1 shows the pooling of risk for fire insurance. Some of the insurance claims were for warehouse fires. 1000 companies require fire insurance, paying an average premium of $300 each. Insurance pool 10 companies make fire claims. Average value of each claim is $25000. Fig. 5.1 Use Fig. 5.1 to help you answer the following questions.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2025). The mark or mark type is shown in brackets.

1. [1] Risk reduction / reduce losses
2. [1] Compensation / pay for damage / repair damage
3. [1] Financial protection/cover / protection
4. [1] Business confidence
5. [1] Legal requirement e.g. motor insurance
6. [1] Investment
7. [2] Correct answer = $50 000 (2) Method = (1000 × $300) = $300 000 – (10 × $25 000) = $250 000 (1) OR Method = 300 000 – 250 000 (1) OR Method = (1000 × $300) – (10 × $25 000) (1)
8. [1] Businesses can manufacture goods in bonded warehouses. FALSE
9. [1] Cold storage warehouses store perishable items. TRUE
10. [1] Robots in warehouses reduce errors in the supply chain. TRUE
11. [1] Cheque is a bank (drawee) order, and cheques can be crossed for security purposes to pay the person named (payee) on the cheque for a sum of money. The cheque is signed by the person wishing to make the payment. The cheque will be paid into the insurance company's bank account. However, cheques can be dishonoured.
12. [1] Direct debit is a bank service that enables recurring regular or irregular payments at regular / irregular times to be paid from a bank account when requested by the creditor. Gives insurance company the ability to take a sum of money and debit the customer's account as authorised by customer.
13. [1] Flexible method of payment because different amounts can be paid if premiums change
14. [1] They provide proof of payment because the transaction is recorded on bank statement
15. [1] Lower processing fees compared to accepting payment by credit card
16. [1] Some people e.g. older customers prefer to pay by cheque and not use electronic payment methods
17. [1] Using cheques make insurance companies accessible to all customers, including those without internet access
18. [1] Cheques are not legal tender and do not have to be accepted for payment
19. [1] The cheque may be dishonoured so cheque might be refused for payment It may take days for the cheque to arrive in the post/be cleared so that lead to a delay for the insurance company in receiving the premium or the customer having insurance cover
20. [1] If cheque is not accurately completed / signed and therefore will be dishonoured and will delay payment of premium.
21. [1] Direct debit: Guaranteed income for insurance company because they automatically collect premium payments
22. [1] The insurance company does not have to rely on customer's punctuality of payment leading to better cash flow
23. [1] Reduces bad debts as immediate payment compared to paying by cheque
24. [1] Lower costs e.g. no invoicing / chasing late payments compared to collecting premiums by cheques
25. [1] Reduction of manual / administration tasks in processing cheques such as taking cheques to the bank for depositing which wastes time and incurs costs
26. [1] Reduction in sending reminders which saves administration costs
27. [1] Flexible/timesaving with variable amounts as no need for customer to set up a new payment every time
28. [1] Convenient for customers because they do not have remember to cheque payments each month
29. [1] Reduces the risk to customer of missing payments leading to penalties
30. [1] The customer might not have sufficient funds in their account leading to non-payment which disrupts the relationship between the insured and the insurer.
31. Evaluation: Not all customers may have access to the internet, so they may only be able to pay by cheque. Despite the continued acceptance of cheques, insurance companies are increasingly moving towards digital payments. Therefore, in conclusion I recommend that direct debit is the more efficient method of payment for the insurance company to accept premiums as they can take a series of payments without the need for separate authorisations, making it more efficient than one cheque payment.