General Insurance Concepts
Risk, peril, and hazard
Insurance transfers pure risk - the chance of loss or no loss. Speculative risk (chance of gain) is not insurable. Peril is the cause of loss (fire, death, accident); hazard is a condition that increases the chance or severity of loss. Physical hazards are tangible (icy steps, poor health). Moral hazard is dishonest intent (arson, faking a disability). Morale hazard is indifference or carelessness (leaving keys in a car because "insurance will pay"). Adverse selection is the tendency of higher-risk people to seek or retain coverage; underwriting, waiting periods, and exclusions exist to control it.
Core principles
- Insurable interest - life insurance requires it at application (policy inception) only; property insurance requires it at the time of loss.
- Indemnity - property and health benefits restore the insured to the pre-loss financial position, never beyond it. Life insurance is a valued contract; the face amount is agreed in advance and paid on death regardless of "need."
- Law of large numbers - the larger and more homogeneous the pool, the more predictable losses become; this is the foundation of rate-making.
- Reinsurance - insurers transfer excess risk to other insurers; the original insured is not a party to that contract.
Risk management and insurer types
Risk can be avoided, retained, reduced, shared, or transferred (transfer = buying insurance). Insurers include stock companies (shareholders), mutual companies (policyholders), fraternal benefit societies, reciprocals, and Lloyd's-type associations. Distribution systems include career agents, independent agents, brokers, and group/worksite marketing.
Traps: questions often blur hazard with peril, or ask when insurable interest must exist for life coverage - it is at policy issue, not at death. Another frequent distractor is that "negligence makes a risk uninsurable"; ordinary negligence is insurable, intentional acts generally are not.
Worked example: a homeowner who stops locking the door after buying coverage is exhibiting morale hazard; a person who buys fire insurance planning to burn the building is exhibiting moral hazard.