Risk Management and Insurance Planning
Domain overview
Risk management and insurance planning tests how you identify exposures, choose a treatment, and evaluate policy terms. Questions focus on insurable interest, indemnity, deductibles, coinsurance, policy limits, and the difference between replacing an asset and paying off a loss.
Treating risk
The main treatments are avoidance, reduction, retention, and transfer. Insurance transfers a defined risk for a premium. Core principles include insurable interest, indemnity (restoring the insured to the same financial position, not better), utmost good faith, and subrogation. Read exclusions and definitions before comparing premiums.
Coverage design
Life insurance protects dependents against lost income; disability insurance replaces part of earned income; health insurance covers medical costs; property and liability policies protect assets and legal exposure. A deductible is the insured's share before benefits; coinsurance is a percentage share; a policy limit caps payout. For property, check whether settlement is replacement cost or actual cash value.
Worked example
A home has a replacement cost of $400,000. The policy limit is $300,000, the coinsurance clause requires 80% of replacement cost ($320,000), and the deductible is $1,000. A covered loss is $100,000. Because the limit is below the required $320,000, the payout is reduced: ($300,000 ÷ $320,000) × $100,000 = $93,750, less the $1,000 deductible = $92,750. The reasoning shows why buying a limit below the coinsurance requirement creates a penalty at claim time.
Traps that cost marks
- Insuring market value when replacement cost is the basis.
- Ignoring coinsurance and policy limits.
- Confusing a deductible with a copay.
- Assuming all losses are covered without checking exclusions.