General Insurance Concepts and Principles
Core vocabulary
Insurance transfers pure risk (loss or no loss), never speculative risk (loss or gain). A peril is the cause of loss; a hazard is a condition that increases the chance or severity of loss - physical, moral (dishonesty), or morale (indifference). Insurable interest must exist at the time of loss for property and at inception for life insurance. The principle of indemnity restores the insured to the pre-loss financial position, no better; replacement cost and valued forms are limited exceptions. Other principles: utmost good faith (representations, concealment, warranties), subrogation, contribution, and the law of large numbers, which lets insurers predict losses across a pool.
Policy architecture
Declarations (who, what, where, how much), insuring agreement, conditions, exclusions, and definitions. A binder is temporary evidence of coverage until the policy issues. Waiver is voluntary surrender of a known right; estoppel prevents a party from asserting a right after the other party relied on contrary conduct.
Limits, deductibles, and sharing
Limits may be per person, per occurrence, or aggregate. Deductibles may be flat dollar or percentage. Coinsurance in property is a value requirement, not a shared-loss arrangement with the insured's pocketbook. Other-insurance clauses usually pay pro rata by limit.
Worked example
A building has a $1,000,000 replacement cost, an 80% coinsurance clause, and $600,000 of insurance carried. A $200,000 covered loss occurs and a $5,000 deductible applies. Required insurance is $800,000; the ratio is 600,000 / 800,000 = 75%; the penalty payment is $200,000 × 0.75 = $150,000, less the $5,000 deductible, for $145,000. Carrying the full $800,000 would have paid $195,000.
Traps
Confusing peril with hazard; treating a coinsurance penalty as a deductible; and forgetting to subtract the deductible after applying the coinsurance ratio.