General Insurance Concepts and Principles
The vocabulary core
Risk is uncertainty about loss; a peril is the cause of loss (fire, wind, theft); a hazard is a condition that increases the chance or severity of loss. Hazards come in three flavors: physical (icy steps, faulty wiring), moral (dishonesty - arson for profit, claim fakery), and morale (carelessness - leaving keys in the car, ignoring maintenance). Only pure risk (loss or no loss) is insurable; speculative risk (gain or loss) is not.
Characteristics of an insurable risk
A large number of similar exposure units, accidental and unintentional losses, definite and measurable loss, calculable probability (law of large numbers), losses that are not catastrophic to the insurer, and a premium that is economically feasible. Adverse selection - attracting only the worst risks - is controlled through underwriting, classification, and exclusions.
Contract principles
Insurance is a contract of indemnity (restore, not profit), of utmost good faith (representations, concealment, warranties), of adhesion (written by the insurer, ambiguities construed against the drafter), aleatory (unequal exchange), and conditional (benefits depend on the insured's compliance). Key doctrines: insurable interest, subrogation, coinsurance, and reinsurance. Risk-handling techniques are avoidance, retention, transfer, sharing, loss prevention, and loss reduction.
Traps
Students routinely swap hazard and peril, and they miss morale hazard (attitude) versus moral hazard (intent to defraud). Do not call insurance a gambling contract - insurance handles an existing pure risk and requires insurable interest; gambling creates a new speculative risk.
Worked example: A storeowner leaves a loaded hand truck in an aisle (physical hazard), exaggerates a theft loss (moral hazard), and skips snow removal to save money (morale hazard).