Insurance Principles and Risk Management
Core concepts
Insurance is a mechanism for transferring the financial consequences of uncertain events from an individual or firm to a pool of premium payers. Candidates must be fluent in insurable interest, utmost good faith, indemnity, subrogation, contribution and proximate cause. Distinguish pure risk (loss or no loss) from speculative risk (loss, gain or no loss); only pure risk is normally insurable. A risk must be measurable, accidental, of sufficient frequency and severity to be predictable in aggregate, and not catastrophic to the insurer's solvency.
Risk management process
Know the cycle: identify, analyse and measure, control (avoid, reduce, transfer, retain), implement, monitor and review. Hazard increases the chance or severity of loss (physical, moral, morale); peril is the cause of loss. Treat moral hazard as a behavioural risk indicator in underwriting.
Traps in questions
Questions often conflate risk retention with risk transfer, or present speculative risk as insurable. Watch for 'indemnity' being applied to life assurance, where the benefit is agreed in advance and indemnity does not apply. Also be careful with contribution: it applies between policies covering the same interest, peril and subject matter, not merely similar policies.
Worked rule of thumb
A factory worth 2,000,000 is insured for 1,200,000 under a policy with average (underinsurance) condition. A 400,000 loss occurs. Claim = loss × (sum insured ÷ value at risk) = 400,000 × (1,200,000 ÷ 2,000,000) = 240,000. Always test whether the policy is 'sum insured' or 'reinstatement value' before applying averaging.
Exam technique
Map each scenario to the risk management step being described, then name the principle involved. State the definition, apply it to the facts, and conclude.