Insurance Principles and Concepts
Risk, peril, and hazard
Risk is uncertainty about loss. Insurance transfers pure risk (loss or no loss); it does not handle speculative risk (profit or loss, as in gambling or investing). A peril is the cause of loss - fire, windstorm, theft. A hazard increases the chance or severity of loss: physical (icy steps, faulty wiring), moral (dishonesty or deliberate acts, like arson or claim fraud), and morale (carelessness or indifference because insurance exists).
Insurable risks generally require many similar exposure units, losses that are definite and measurable, accidental loss, a calculable chance of loss, affordable premiums, and no catastrophic concentration.
Contract characteristics
Insurance is a contract of adhesion (insurer drafts it, so ambiguity is construed against the insurer), aleatory (unequal exchange of value), conditional, unilateral, and one of utmost good faith. Representations are statements believed true; warranties are guaranteed; concealment is intentional silence about a material fact. Insurable interest must exist at inception for life insurance but at the time of loss for property. Indemnity restores the insured to roughly the pre-loss financial position - valued policies and life insurance are exceptions. Subrogation supports indemnity and never applies to life insurance.
Traps
Moral versus morale hazard is the single most-missed distinction. Questions about proximate cause want the efficient, uninterrupted cause of loss, not merely the last event. Watch for items asking when insurable interest must exist.
Worked example
A cook leaves hot oil unattended (morale hazard), a fire starts (peril), and smoke damages the dining room. Fire is the proximate cause of the smoke damage, so the claim is covered even though the smoke itself was not the initiating event.
Rule of thumb
If a claims payment leaves the insured financially better off than before the loss, indemnity has been violated.