General Insurance Concepts
Risk, perils, and hazards
Risk is the uncertainty of loss. A peril is the cause of loss (fire, death, illness). A hazard increases the chance or severity of loss and comes in three forms: physical (icy steps), moral (dishonesty, such as faking a claim), and morale (carelessness because insurance exists). Only pure risk-loss or no loss-is insurable. Speculative risk, which offers the chance of gain, is not.
Core principles
Insurable interest is a financial interest in the continued life or property of the insured. In property insurance it must exist at the time of loss; in life insurance it must exist only at policy issue. Indemnity restores the insured to the pre-loss financial position, which is why property claims are capped at actual loss. Life insurance is the exception: it is a valued contract paying a stated face amount, so indemnity does not apply. Subrogation lets the insurer pursue a third party after paying a claim. The law of large numbers lets insurers predict losses across many similar exposures, which is the basis of ratemaking. Adverse selection-higher-risk applicants buying more coverage-is controlled through underwriting.
Insurer types and authority
Stock insurers are owned by shareholders; mutual insurers by policyholders; fraternals by members; reciprocals by subscribers. Producers may hold express authority (written in the contract), implied authority (customary acts), or apparent authority (what a reasonable third party believes based on the insurer's conduct). Insurers can be estopped from denying coverage when they voluntarily waive a right.
Trap
Questions love to ask when insurable interest must exist. For life insurance it is at application or issue, not at death.
Rule of thumb
If a loss can produce a profit, it is not insurable.