Insurance Principles and Regulation
Core concepts
Insurance transfers risk by pooling many exposures; the law of large numbers makes the pool's average loss far more predictable than any single loss. A candidate must be able to define risk transfer versus risk retention, insurable interest, indemnity, subrogation, and utmost good faith. Distinguish adverse selection (information asymmetry before the contract is bound, driving away good risks) from moral hazard (behavioral change after coverage exists).
Policy mechanics
Know how deductibles, limits, coinsurance, and exclusions interact, and whether a provision applies per occurrence, per person, or per policy period. In property insurance the coinsurance clause is a percentage-of-value requirement:
payment = (limit / (coinsurance% × value at risk)) × loss,
capped at the limit, then reduced by the deductible. That is entirely different from coinsurance in health or liability lines, which is a percentage cost-sharing split with the insurer.
Regulation and reinsurance
Solvency regulation centers on risk-based capital, reserve adequacy, rate filing, market conduct, and guaranty funds. Reinsurance is proportional (quota share, surplus share) or excess of loss; the ceding company's retained share determines net liability and net premium.
Worked example
Building value 1,000,000; 80% coinsurance; limit 600,000; loss 200,000; deductible 5,000. Required insurance = 800,000. Payment = (600,000/800,000)(200,000) − 5,000 = 145,000.
Traps
Insurable interest must exist at time of loss for property but only at policy inception for life. Read whether the deductible is applied before or after proportional sharing, and whether the limit is gross or net of the deductible.