General Insurance Concepts and Principles
Core vocabulary
Risk is uncertainty concerning loss; a peril is the cause of loss (fire, wind, collision); a hazard increases the chance that a peril will occur or worsen the loss. Physical hazards are tangible (oily rags, icy steps), moral hazards involve dishonesty (arson for profit), and morale hazards involve carelessness (leaving a building unlocked). Insurance transfers pure risk (loss or no loss), never speculative risk (the chance of gain).
Governing principles
Insurable interest must exist at the time of loss for property and at policy inception for life. Indemnity restores the insured to pre-loss condition, never better. Utmost good faith underlies representations (believed true), warranties (guaranteed), and concealment. Policies are contracts of adhesion (drafted by the insurer, so ambiguities favor the insured) and aleatory (unequal exchange of value). Subrogation lets the insurer pursue the at-fault party after paying a loss.
Rating and valuation
Urban-rural classifications, law of large numbers, and actuarial prediction support underwriting; adverse selection is the danger of attracting only poor risks. Reinsurance - treaty or facultative - spreads catastrophic exposure. ACV = replacement cost minus depreciation; replacement cost pays new without depreciation; a valued policy pays a stated amount.
Worked example (coinsurance): an 80% coinsurance clause on a $1,000,000 building requires $800,000 of insurance. The insured carries $600,000, or 75% of the requirement. A $100,000 loss pays $100,000 x 75% = $75,000, then the deductible is subtracted. Rule of thumb: insure to the coinsurance percentage of full value or share every loss.