General Insurance Concepts
Risk and how it is handled
Insurance transfers pure risk (loss or no loss) - never speculative risk (chance of gain), which is why gambling is uninsurable. A peril is the cause of loss (fire, death, illness); a hazard increases the chance or severity of loss. Physical hazards are tangible (icy steps), moral hazards involve dishonest intent (arson, faking a claim), and morale hazards are carelessness or indifference (leaving keys in the car). Exams swap these terms constantly.
Insurable risk traits
Losses must be accidental, measurable, definite in time and amount, and spread over a large number of similar exposure units (the law of large numbers). Adverse selection - the tendency of poor risks to seek coverage - is managed by underwriting, exclusions, and pricing.
Contract characteristics
Insurance is a contract of utmost good faith (representations, warranties, concealment), of adhesion (insurer drafts, ambiguities favor the insured), aleatory (unequal exchange of value), and unilateral (only the insurer makes a legally enforceable promise). It requires insurable interest, indemnity (restore, don't profit), and supports subrogation and coinsurance.
Core vocabulary
Principal (insurer) and agent; representations vs. warranties vs. misrepresentations; binder; estoppel and waiver; parol evidence; negligence; proximate cause; reinsurance; self-insurance and retention.
Worked example
A homeowner leaves a space heater running next to drapes. The fire is the peril; the unattended heater and the carelessness are hazards (morale). If the owner burned the house deliberately for money, that is a moral hazard.
Traps
Hazard vs. peril; moral vs. morale; void vs. voidable; and confusing indemnity with a valued (agreed-amount) benefit.