General Insurance Concepts
Risk and transfer
Insurance is a mechanism for transferring pure risk from an individual to a pool. Candidates must define risk (uncertainty of loss), peril (cause of loss), and hazard (condition increasing the chance or severity of loss). Hazards are physical, moral, and morale. Only pure risk-chance of loss or no loss-is generally insurable; speculative risk (chance of gain or loss) is not. Insurable risk usually requires many similar exposure units, accidental and measurable losses, limited catastrophic potential, and no excessive adverse selection. Insurers use the law of large numbers to predict losses, retention and transfer to manage risk, and reinsurance to spread large exposures.
Indemnity means restoring to pre-loss condition, not profit. Life insurance is valued rather than strictly indemnity because human life has no measurable dollar value. Insurable interest must exist at policy inception for life insurance, but at the time of loss for property insurance-a classic trap. Another trap is mixing peril and hazard: rain is a peril; a leaky roof is a hazard. Worked rule: if an event can produce only gain, it is speculative and generally uninsurable. Example: buying fire insurance on your own home transfers pure risk; buying insurance on a neighbor's home without insurable interest is invalid.