Insurance: Principles, Product Mechanics and Exam Pitfalls
What you must understand
Candidates must know the core principles: insurable interest, utmost good faith, indemnity, proximate cause, contribution, and subrogation. Understand the difference between indemnity and benefit policies, and why life and personal accident cover are benefit policies rather than strict indemnity. Know the roles of the insurer, policyholder, beneficiary, broker, and underwriter, and the meaning of sum insured, excess, deductible, premium, and no-claims discount. For life products, understand term, whole-of-life, endowment, and annuities, and the difference between protection and savings elements.
Traps that appear in questions
- Indemnity versus benefit. A question may ask what a householder can recover after a loss. Indemnity means restoring to the pre-loss financial position, never profiting.
- Contribution and subrogation. Contribution applies between policies covering the same interest; subrogation lets the insurer pursue a negligent third party after paying the claim. Questions often swap these.
- Proximate cause. The nearest effective cause, not the last event, determines cover.
- Utmost good faith versus warranty. A breach of warranty can discharge liability from the date of breach; non-disclosure is handled differently.
- Free-look and cooling-off periods are frequently confused with the waiting period before cover begins.
Worked example
A property insured for 80,000 suffers a 40,000 loss, but the sum insured is 100,000 while the reinstatement value is 120,000. Under average (underinsurance), the claim is reduced by the ratio of sum insured to value: 40,000 x (100,000 / 120,000) = 33,333. The trap is answering 40,000 by ignoring the average condition.
Rule of thumb
Before answering any claims question, identify the policy type, whether indemnity or benefit applies, whether average or another condition modifies the payout, and whether another policy contributes.