Principles of Insurance (LOMA 280)
The Principles of Insurance domain of LOMA 280 tests how risk is identified, pooled, transferred, and priced, and how the doctrines of insurable interest, indemnity, and utmost good faith shape coverage. Expect definitions plus short scenarios asking you to classify a hazard or apply a doctrine.
Risk, peril, and hazard
Risk is uncertainty about loss. A peril is the cause of loss - fire, windstorm, death. A hazard is a condition that raises the chance or severity of loss: physical (faulty wiring), moral (dishonesty, such as arson for profit), or morale (carelessness, such as leaving doors unlocked because insurance exists). Underwriters evaluate perils and control hazards.
Insurable interest and indemnity
Insurable interest means the policyholder would suffer a real financial loss. Property insurance requires it when the policy is issued and at the time of loss; life insurance requires it at issue only, and presumes it for oneself, a spouse, or a firm insuring a key employee.
Indemnity restores the insured to the pre-loss financial position, never better. Actual cash value equals replacement cost minus depreciation. Life insurance and valued policies pay a stated amount and are recognized exceptions to strict indemnity.
Pooling, adverse selection, moral hazard
Pooling combines many independent, similar exposure units so actual losses converge on expected losses (the law of large numbers). Larger, more homogeneous pools make results more predictable. Adverse selection is the tendency of higher-risk applicants to buy or retain coverage; underwriting and eligibility rules counter it. Moral hazard is the behavior change that insurance itself creates.
Worked example
A retailer insures a warehouse at $400,000 replacement cost; depreciation is $100,000 and the deductible is $5,000. Fire destroys the building. ACV is $300,000, so the insurer pays $295,000. Had the owner removed the sprinkler system to save money, that morale hazard could jeopardize the claim.
Traps
Calling a hazard a peril; believing pooling removes risk rather than making losses predictable; applying property insurable-interest timing to life policies; treating replacement cost as the default indemnity measure; and confusing adverse selection (who buys) with moral hazard (how insureds behave).