Insurance Principles and Concepts (Life and Health)
Risk, peril, hazard
Risk is uncertainty about loss; a peril is the cause of loss (death, sickness); a hazard is a condition that increases the chance or severity - physical (smoking), moral (intent to defraud), or morale (carelessness). Only pure risk (loss or no loss) is insurable. Speculative risk, which carries a chance of gain, is not.
Why pooling works
The law of large numbers lets insurers predict losses across many similar exposure units, which is what sets rates. Anything that attracts poor risks - adverse selection - raises cost, which is why accurate applications and field underwriting matter. An insurable risk needs many similar units, accidental and measurable losses, and a loss that will not overwhelm the insurer.
Contract characteristics (heavily tested)
Life and health policies are contracts of adhesion (the insurer writes the terms, so ambiguity favors the insured), aleatory (the values exchanged are unequal), unilateral (only the insurer makes an enforceable promise), conditional (benefits depend on conditions), and formed under utmost good faith. Life insurance is not a contract of indemnity - it pays a stated face amount because a human life has no measurable value. Health insurance behaves much more like indemnity.
Representations vs. warranties
A representation is believed true; a warranty is guaranteed true. A material misrepresentation or concealment lets the insurer rescind; fraud voids from inception.
Agency authority
Express authority is written in the agency contract; implied is what is reasonably necessary to do the job; apparent is what the insurer's words or conduct lead a third party to believe.
Rule of thumb: if the applicant reasonably believed the agent was acting for the insurer, answer apparent authority - and the insurer is bound. Also remember: insurable interest in life insurance is tested at application, not at death.