Registered Insurance Brokers of Ontario (RIBO) Practice Exam

How does an assessment mutual collect funds from its members?

1. By charging fixed premiums annually

2. By having members sign a premium note to be drawn only if needed

3. Through direct contributions from profits

4. By requiring upfront payment for potential claims

The correct answer is: By having members sign a premium note to be drawn only if needed

The correct answer highlights the unique operational structure of assessment mutuals. These organizations do not operate on a fixed premium model like traditional insurers. Instead, they employ a system where members agree to pay premiums only when needed, based on their collective underwriting results. By having members sign a premium note, they effectively commit to pay an amount that will be drawn only if the mutual's losses or claims exceed the available funds. This system allows for a more flexible approach to funding, aligning members' contributions with the actual claims experience of the group. If claims are low, members may not need to pay any premium at all. This minimizes financial burden during years when claims are down, making it an appealing structure for members, as they share in the costs based on the mutual's performance rather than pre-paying fixed premiums in advance. The other options reflect different fundraising methods not typically used by assessment mutuals. Fixed premiums would create a predictable cost structure that does not align with the assessment mutual value proposition. Direct contributions from profits could suggest a different type of financial model, which contrasts with the concept of pooling risk. Finally, requiring upfront payment for potential claims would not be characteristic of an assessment mutual, as this model relies on community trust and members’ agreement to cover losses