Insurance Principles and Concepts
Insurance Principles and Concepts is the foundation domain. It tests whether you can separate risk transfer from risk retention, apply indemnity correctly, and use the legal doctrines that decide coverage disputes. Expect questions on pooling, insurable interest, utmost good faith, proximate cause, subrogation, contribution and moral hazard.
Core rules
- Risk pooling spreads expected losses across many exposed units; the law of large numbers makes outcomes more predictable as the pool grows and risks are independent.
- Insurable interest is a financial or legal relationship to the subject matter. In property it must exist at the time of loss; in life it must exist at inception.
- Indemnity restores the insured to the pre-loss financial position, no better. Life and personal accident benefits are valued benefits, not indemnity.
- Utmost good faith requires material disclosure by the proposer and fair presentation by the insurer.
- Proximate cause is the dominant, effective cause, not necessarily the last event.
- Subrogation lets an indemnity insurer step into the insured's recovery rights after payment; contribution shares a loss among insurers covering the same interest.
Worked example
Stock worth 6,000,000 is insured for 5,000,000. Fire causes a 1,200,000 loss. The average clause applies: 5,000,000 / 6,000,000 x 1,200,000 = 1,000,000. The insured bears 200,000 as underinsurance. If a second policy also covers the same stock, the two insurers contribute proportionately to the 1,000,000 payable; the insured cannot recover more than the actual loss. Reasoning: indemnity caps the recovery, average penalises underinsurance, and contribution prevents double recovery.
Traps
- Treating a life policy as indemnity and deducting depreciation from a death benefit.
- Testing insurable interest at the wrong time.
- Confusing proximate cause with the final event in a chain.
- Applying subrogation to life or personal accident benefits.
- Ignoring that contribution requires the same insured, interest and peril.