General Insurance Concepts and Principles
Risk and how insurance handles it
Insurance transfers pure risk (loss or no loss) from an individual to a pool; speculative risk (chance of gain) is not insurable. Insurers use the law of large numbers to predict losses and underwrite to control adverse selection - the tendency of high-risk people to buy coverage.
Contract characteristics
Insurance is a contract of adhesion (written by the insurer, so ambiguities are construed against the insurer), conditional (benefits require conditions such as proof of loss), aleatory (values exchanged are unequal), unilateral (only the insurer makes an enforceable promise once premium is paid), and uberrimae fidei (utmost good faith). Representations are statements believed true; warranties are guaranteed; concealment of a material fact can void coverage; fraud is intentional deception.
Core principles
Insurable interest exists when a person would suffer a financial loss - for life insurance it is tested at application only; for property, at time of loss. Indemnity restores the insured to the pre-loss position; life insurance is a valued contract, not indemnity, so the face amount is paid. Subrogation and coinsurance support the indemnity principle. Hazards are physical (ice), moral (intent to cause loss), or morale (carelessness). Reinsurance spreads unusually large risks; retention is the portion kept.
Field underwriting
The producer is the first underwriter: complete the application accurately, record the applicant's exact words, collect the initial premium, and never answer health questions for the client.
Worked example: An applicant hides a smoking habit. During the contestable period the insurer may rescind for material misrepresentation (concealment); a harmless, immaterial error should not void the contract. Trap: moral vs morale hazard is a favorite distractor.