General Insurance Principles and Concepts
Core Principles
Insurance is a mechanism for transferring risk from an individual to a pool of many policyholders. The candidate must be able to distinguish pure risk (loss or no loss) from speculative risk (loss, gain, or no loss) and know that only pure risk is insurable. Understand the six characteristics of insurable risk: a large number of homogeneous exposure units, accidental and unintentional losses, measurable losses, definite loss in time and place, no catastrophic loss to the pool, and calculable probability.
Risk Management
Know the four techniques: avoidance, reduction, retention, and transfer. Insurance is a transfer technique; loss prevention (reducing frequency) and loss reduction (reducing severity) are distinct concepts that questions often blur. Master the law of large numbers - the more exposure units, the more predictable aggregate losses become - and how it supports underwriting and rate-making.
Indemnity and the Supporting Doctrines
Indemnity restores the insured to approximately the pre-loss financial position, no better and no worse. Supporting doctrines include insurable interest (must exist at policy inception for property, at inception and at death for life), utmost good faith (duty of disclosure), subrogation (insurer steps into the insured's shoes after paying), and contribution (sharing a loss among multiple insurers).
Traps
Questions frequently swap insurable interest timing between life and property, or describe subrogation as applying to life insurance (it does not). Another trap: confusing moral hazard (dishonest intent) with morale hazard (carelessness).
Rule of Thumb
If the insured would profit from a loss, indemnity has been breached. Life insurance is the classic exception to strict indemnity because a human life has no measurable value.