General Insurance Concepts
Risk and its elements
Insurance transfers pure risk (loss or no loss) and never speculative risk (chance of gain), which is uninsurable. A peril is the cause of loss (fire, death, accident); a hazard increases the likelihood or severity of loss. Physical hazards are tangible; moral hazard reflects dishonesty (faking a claim); morale hazard reflects indifference (carelessness because insurance exists). Insurers fight adverse selection by underwriting, and rely on the law of large numbers to predict losses across a large, similar pool. Reinsurance is insurance for insurers.
Contract characteristics
Insurance contracts are contracts of adhesion (insurer drafts, ambiguities favor the insured), aleatory (unequal exchange of value), unilateral (only the insurer makes an enforceable promise once premium is paid), conditional (benefits depend on conditions), and governed by utmost good faith (no concealment, misrepresentation, or fraud). A valid contract needs offer, acceptance, consideration, legal purpose, and competent parties.
Core principles
Insurable interest supports enforceability. Indemnity restores the insured to pre-loss financial position - life insurance is a valued contract and pays the face amount regardless of need. Subrogation lets an insurer pursue the at-fault party after paying a claim. Utmost good faith is breached by material misrepresentation, concealment, or warranty violation.
Trap: Life insurance requires insurable interest only at the time of application - not at death. Property insurance requires it at the time of loss.
Worked example: An employer buys key person coverage on an executive; ten years later the executive resigns and dies. The claim is payable because insurable interest existed when the policy was issued.