Insurance Fundamentals and Principles of Insurance
This domain tests the foundation of every life policy: how risk is pooled, which principles apply, and which do not. Expect questions on insurable interest, utmost good faith, indemnity and the special character of life insurance.
Risk pooling and insurable risk
Insurance transfers the financial consequence of an uncertain event to a pool. An insurable risk is accidental, measurable, shared by many similar lives and priced affordably. In life insurance death is certain; only its timing is uncertain, so the product is a benefit policy, not a reimbursement of loss.
Principles examiners test
- Insurable interest must exist when the policy is taken. It is presumed for one's own life; for another life there must be a pecuniary relationship (spouse, creditor, key employee). It need not continue until death.
- Utmost good faith requires the proposer to disclose all material facts; the insurer relies on the proposal.
- Indemnity, subrogation and contribution belong to property and health insurance and do not apply to life.
- Proximate cause decides which peril triggered the loss.
Worked example
Ravi takes a policy on his friend's life and pays the premiums. Is the claim payable? No. Ravi had no insurable interest at inception, so the contract is void. By contrast, a policy on his own life is valid, but if he suppressed a cancer diagnosis, the insurer may repudiate for non-disclosure.
Traps
Assuming insurable interest must last until death; applying indemnity to a death claim; treating a material omission as harmless.