Insurance Fundamentals and Principles of Insurance
Insurance Fundamentals and Principles of Insurance is the foundation domain. Questions test whether you can explain why insurance works and apply the doctrines that decide whether a loss is covered: insurable interest, indemnity, utmost good faith, proximate cause, subrogation and contribution.
Core principles
- Risk pooling and transfer. Insurance moves a defined pure risk from one policyholder to a pool; the law of large numbers makes aggregate losses predictable even when individual losses are not.
- Insurable risk test. Many similar exposure units, accidental and measurable loss, a definable peril, losses that are not catastrophic to the insurer, and an affordable premium.
- Indemnity. The insured should be restored to approximately the pre-loss financial position, no better. Agreed-value policies, new-for-old and valued marine covers are deliberate exceptions.
- Insurable interest. Property: required at the time of loss. Life: required at inception. Timing rules differ by jurisdiction, so read what the question assumes.
- Utmost good faith. The applicant must disclose material facts the insurer could not reasonably be expected to discover.
- Proximate cause. The dominant, effective cause governs; a remote cause does not bring the loss back into cover.
- Subrogation and contribution. Subrogation transfers the insured's recovery rights to the paying insurer; contribution shares one loss among insurers covering the same interest.
Worked example
A shop is insured against fire under Policy A for a sum insured of 100,000 and Policy B for 40,000. A fire causes a 30,000 loss. Total sums insured are 140,000, so on a sums-insured basis A pays 30,000 x 100/140 = 21,429 and B pays 8,571. The shop recovers 30,000 once. Indemnity caps total recovery; contribution only decides who pays which share.
Traps that cost marks
Confusing moral hazard (dishonesty, exaggeration) with physical hazard (construction, storage). Treating subrogation and contribution as the same doctrine. Assuming indemnity always means replacement cost. Ignoring the timing rule for insurable interest.