Insurance Principles and Concepts
Core Principles
Insurance transfers risk from an individual to a pool in exchange for premium. Candidates must understand insurable interest, indemnity, utmost good faith, subrogation, and proximate cause. Insurable interest must exist at the time of loss for property coverage. Indemnity restores the insured to pre-loss financial position, subject to policy limits and deductibles.
Risk and Policy Mechanics
Know the difference between pure and speculative risk, moral and morale hazard, and adverse selection. Understand retention, transfer, avoidance, and loss control as risk management techniques. Policy structure includes declarations, insuring agreement, conditions, and exclusions. Deductibles, coinsurance, and limits shape the actual recovery.
Traps
Questions often test whether insurers may subrogate against an insured's own household member or whether indemnity permits profit. Another trap is confusing actual cash value with replacement cost. Also watch for moral hazard versus morale hazard distinctions.
Rule of Thumb
Indemnity means no better, no worse. If a proposed settlement leaves the insured better off than before the loss, recheck the valuation method.
Worked Example
A homeowner with a $500 deductible suffers $4,000 in damage. Under replacement cost with adequate limits, recovery is $3,500, assuming no depreciation or coinsurance penalty applies.