Principles and Practice of Insurance
The mechanism
Insurance transfers the financial consequence of an uncertain event from one party to a pool of many. Three ideas underpin it: pooling (many exposures share the cost of the few), the law of large numbers (larger, more homogeneous pools make outcomes more predictable) and mutuality (premiums of the many pay the losses of the few). Risk management tools - avoidance, reduction, retention, transfer - sit around this, and hazards are classified as physical, moral and morale; confusing moral hazard (dishonesty) with morale hazard (carelessness) is a favourite trap.
The principles
Candidates must state and apply: insurable interest, utmost good faith (disclosure of material facts plus no misrepresentation), indemnity, proximate cause, subrogation, contribution and mitigation of loss. Two timing rules decide most questions: insurable interest must exist at inception for life policies but at the time of loss for property; and a life policy is not a contract of indemnity, so subrogation and contribution do not apply to it.
Traps in questions
- Proximate cause is the dominant, effective cause, not necessarily the last event.
- A material fact is what a prudent insurer would want to know; non-disclosure allows avoidance, not merely a reduced payout.
- Average (underinsurance) applies to property, never to life.
Rule of thumb - contribution
Two policies cover the same property and the same interest. A: ₦6m, B: ₦4m; loss ₦5m. Each pays rateably: A = 5 × 6/10 = ₦3m; B = 5 × 4/10 = ₦2m. The insured cannot profit - a total above the loss would breach indemnity.