General Insurance Principles and Concepts
Core risk vocabulary
Risk is uncertainty about loss. Insurance transfers pure risk (loss or no loss) and never speculative risk (chance of gain or loss). Exposure units, the law of large numbers and adverse selection explain why insurers can predict aggregate losses - and why they avoid concentrations of identical risks. A peril is the cause of loss (fire, wind, theft). A hazard is a condition that increases the chance or size of a loss: physical (icy stairs), moral (intent to defraud), or morale (carelessness).
The governing principles
Indemnity - restore the insured to the pre-loss financial position; no profit from loss. Insurable interest - for property, it must exist at the time of loss; for life insurance, at inception. Utmost good faith - both parties disclose material facts; misrepresentation, concealment and warranty breach can void coverage. Subrogation - after paying, the insurer steps into the insured's shoes against the responsible third party. Contribution - concurrent policies share the loss. Proximate cause - the dominant, efficient cause of a loss, not merely the last event in the chain.
Traps the exam likes
- Mixing up peril and hazard, or calling depreciation a hazard.
- Assuming replacement-cost settlement is a violation of indemnity - it is a policy option that can create betterment.
- Forgetting that subrogation does not run against the insured's own household members in most personal lines forms.
Worked example: a $20,000 roof is 25% depreciated and the policy has a $500 deductible. ACV = $20,000 × 0.75 = $15,000; the payment is $15,000 − $500 = $14,500. Deductibles come off last.