General Insurance Concepts
The building blocks
Insurance transfers a pure risk (loss or no loss) to a pool; speculative risk (chance of gain) is uninsurable. Understand the trio: peril is the cause of loss (fire, illness, death), hazard is a condition that increases the chance or severity of loss, and risk is uncertainty itself. Hazards come in flavors - physical (icy steps), moral (dishonesty, e.g., faking a claim), and morale (indifference, e.g., leaving a door unlocked).
A loss is insurable when it is accidental, definite and measurable, large enough to matter, calculable, and not catastrophic to the pool. The law of large numbers lets insurers predict losses as the number of similar exposure units grows.
Guiding principles
- Insurable interest - in life insurance it must exist at policy purchase; in property, at the time of loss.
- Indemnity - restore, never profit. Life insurance is a valued contract and a recognized exception.
- Utmost good faith - both parties disclose material facts; supported by representations, warranties, and concealment/fraud doctrines.
- Adhesion - the insurer drafts, the insured accepts; ambiguities are construed against the drafter.
- Aleatory - the exchange is unequal and contingent on an uncertain event.
- Waiver and estoppel, subrogation, and coinsurance as a sharing mechanism.
Handling risk and structuring insurers
Risk is avoided, retained, shared, or transferred. Adverse selection - the tendency of higher-risk buyers to seek coverage - is why underwriting, exclusions, and rating classes exist. Understand insurer types (stock, mutual, reciprocal, fraternal, surplus lines) and distribution (career/independent agents, brokers, direct writers, MGAs, TPAs).
Trap: reinsurance is an agreement between insurers and creates no privity with the insured - the policyholder cannot demand payment from the reinsurer.
Worked example: insuring a $200,000 building for $400,000 is speculative over-insurance; indemnity principles limit recovery to the actual loss.