Insurance Principles and Concepts
The foundation ideas
This domain rewards candidates who can apply risk-transfer principles, not just define them.
Risk. Insurance handles pure risk - loss or no loss. Speculative risk (chance of gain as well as loss) is uninsurable. Insurers pool many similar exposure units so actual results approximate predicted results (law of large numbers). Adverse selection (poor risks seek coverage), moral hazard (dishonesty), morale hazard (indifference/carelessness), and physical hazard (tangible conditions) all push rates up.
Insurable interest. For property, the interest must exist at the time of loss; for life insurance, at policy inception. If the insured would profit from the loss, the interest is not insurable and the indemnity principle is defeated.
Contract characteristics. Insurance is a contract of adhesion (insurer writes it, ambiguity is read against the insurer), aleatory (values exchanged are unequal), unilateral (only the insurer makes an enforceable promise, conditional on the insured's compliance), and of utmost good faith (representations, warranties, concealment). Valid-contract elements: offer, acceptance, consideration, legal purpose, competent parties.
Indemnity and subrogation. Indemnity restores the insured to the pre-loss financial position and never better. Subrogation lets the insurer stand in the insured's shoes against the negligent third party, supporting indemnity and shifting fault to the wrongdoer.
Producer authority and equitable doctrines. Authority may be express, implied, or apparent. Waiver is the intentional surrender of a known right; estoppel is waiver plus detrimental reliance by the insured. Either can bind an insurer despite policy language.
Trap: questions swap waiver and estoppel, or claim a neighbor may insure your house. Rule of thumb: ask two questions of any loss - was there a real financial loss, and did the insured hold a legal interest at the time of loss? If either is no, indemnity fails.