Insurance Principles and the Business Environment
Core risk concepts
Insurance transfers and pools pure risk-loss or no loss-rather than speculative risk, which offers gain or loss. An insurable risk generally requires many similar exposure units, accidental and measurable loss, calculable probability, an economically feasible premium, and no severe catastrophic correlation.
Contract doctrines
Life and health policies are contracts of adhesion (the insurer drafts), aleatory (unequal exchange), and unilateral (only the insurer makes an enforceable promise). The principle of indemnity restores property insureds to their pre-loss financial position; life insurance is a valued contract, so the face amount is paid regardless of financial need. Insurable interest must exist at policy inception for life insurance, but at the time of loss for property. Utmost good faith imposes disclosure duties and supports rescission for material misrepresentation. Adverse selection is the tendency of high-risk buyers to seek coverage, controlled by underwriting, exclusions, and waiting periods; moral hazard is behavior change after coverage.
Business environment
Insurers distribute through career agents, independent brokers, banks, worksite, and direct channels. They operate amid financial-services convergence, reinsurance, and state-based regulation. Reinsurance transfers risk among insurers, not to policyholders.
Traps and worked example
Traps: confusing risk transfer with risk elimination; applying indemnity to life insurance; misplacing the insurable-interest test. Worked example: a buyer takes a $500,000 life policy and dies 20 years later after the beneficiary relationship ends. The claim is still payable-insurable interest was required only at issue, and the policy is not a contract of indemnity.
Rule of thumb
Insurable interest: life at issue, property at loss.