General Insurance Concepts: Risk, Contract Characteristics, and Agency
Risk vocabulary
Risk is uncertainty about loss; a peril is the cause of loss (fire, death, illness); a hazard is a condition that increases the chance or severity of loss. Hazards are physical (wet floors), moral (dishonesty, insurance-motivated behavior), or morale (carelessness). Pure risk offers loss or no loss and is insurable; speculative risk offers gain or loss and is not. Insurable risks are measurable, accidental, involve a large number of similar exposure units, produce a definite loss, are not catastrophic to the insurer, and are affordable. Adverse selection describes the tendency of poor risks to seek insurance; underwriting and the law of large numbers counter it.
Contract characteristics
Life and health policies are contracts of adhesion (drafted by the insurer; ambiguity is construed against the drafter), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise; the insured's premium keeps it in force), conditional (benefits depend on conditions), personal, and based on utmost good faith. That last principle supports the doctrines of material misrepresentation, concealment, and warranty. Waiver is the voluntary surrender of a known right; estoppel prevents a party from denying a right after another party has relied on its conduct.
Insurable interest
In life insurance, insurable interest must exist at the time of application/policy issue and need not continue. In property insurance, it must exist at the time of loss. Life coverage is not limited by the dollar value of the interest, though financial underwriting applies.
Agency and insurers
Stock insurers are owned by shareholders (nonparticipating); mutual insurers are owned by policyowners (may pay dividends); reciprocal insurers exchange promises through an attorney-in-fact; Lloyd's associations and fraternal societies are specialized forms. Reinsurance is treaty (automatic) or facultative (case by case).
Trap
Do not confuse aleatory with unilateral, and always check the timing of insurable interest.