General Insurance Concepts and Principles
The building blocks
Risk is uncertainty about loss. Only pure risk (chance of loss or no loss) is insurable; speculative risk (chance of gain) is not. A peril is the cause of loss (fire, windstorm, theft); a hazard is a condition that increases the chance or severity of loss. Hazards come in three flavors: physical (oily rags, steep stairs), moral (dishonesty, arson for profit), and morale (indifference, leaving keys in the car). Questions frequently swap peril and hazard.
Insurable risk tests
A large number of similar exposure units, accidental loss, definite and measurable loss, calculable probability (law of large numbers), losses that are not catastrophic to the insurer, and an affordable premium. Adverse selection - insuring the worst risks at average rates - is controlled through underwriting.
Contract principles
Insurance is a contract of adhesion (written by the insurer, so ambiguity is construed against the insurer), aleatory (unequal exchange of values), conditional, and one of utmost good faith (representations, warranties, concealment). Indemnity restores the insured to the pre-loss financial position, with no profit. Insurable interest must exist at the time of loss for property and at inception for life. Subrogation lets the insurer pursue the at-fault party after paying; contribution allocates a loss among insurers.
Risk management
Avoidance, retention, transfer (insurance), loss control, and sharing.
Worked example: A store owner installs a sprinkler system - that is loss control, not avoidance, because the store still operates. If she instead refuses to keep gasoline on the premises, that is avoidance.