Insurance and Risk Management - Study Guide
This domain tests risk identification and transfer through insurance. Expect principles of insurance, insurable interest, indemnity, premium, deductibles, moral hazard and the difference between life and general insurance.
Core ideas
- Risk can be avoided, reduced, retained or transferred; insurance transfers specified risks to an insurer.
- Insurable risks are measurable, accidental, large enough to matter and not catastrophic to the insurer without reinsurance.
- Principles: insurable interest, utmost good faith, indemnity, subrogation, contribution and proximate cause.
- Life insurance is not a contract of indemnity; it pays a sum assured. General insurance normally indemnifies actual loss.
- A deductible is the first part of a loss borne by the insured; co-insurance shares loss above a limit. Reinsurance is insurance for insurers.
Worked example
A property worth ₹20 lakh is insured for ₹15 lakh. A loss of ₹8 lakh occurs. Under the average clause, the claim is reduced in proportion to underinsurance: ₹8 lakh × (15/20) = ₹6 lakh, before any deductible. The reasoning: the insured carried only 75% of the property's value, so only 75% of the loss is covered. If the policy has a ₹20,000 deductible, the payable amount is ₹5,80,000.
Traps
Life insurance does not indemnify; it pays the sum assured. Insurable interest must exist at the time of loss for general insurance and at inception for life insurance. Do not confuse reinsurance with double insurance. A lower premium may mean higher deductible or narrower cover. Moral hazard is behaviour changed by insurance, not the same as adverse selection.