General Insurance Concepts
Core vocabulary
Risk is uncertainty about loss. Pure risk (loss or no loss) is insurable; speculative risk (gain or loss, such as gambling or investing) is not. A peril is the cause of loss; a hazard increases the chance or size of loss. Hazards are physical (icy steps), moral (intent to defraud, such as arson for profit), or morale (carelessness, such as leaving keys in the car).
Contract characteristics
Insurance contracts are contracts of adhesion (written by the insurer, so ambiguity is construed against it), aleatory (unequal exchange, since a small premium may buy a large benefit), unilateral (only the insurer makes an enforceable promise), conditional (the insured must satisfy conditions), and contracts of utmost good faith, supported by rules on representations, warranties, and concealment.
Fundamental principles
Insurable interest must exist at inception for life insurance; for property it must exist at the time of loss. Indemnity restores the insured to the pre-loss financial position; life insurance is a stated-amount exception because a life cannot be valued. Subrogation lets an insurer pursue the at-fault party after paying a claim.
Managing risk
Methods are avoidance, retention, sharing, transfer, and reduction (STARR). Adverse selection, meaning poor risks seeking coverage, is why underwriting and the law of large numbers matter.
Traps
Questions love to swap aleatory with adhesion, or to test the timing of insurable interest. Do not let a property rule bleed into a life insurance question.
Worked example: fire causes $300,000 of damage to a $500,000 building. Indemnity pays the actual loss less any deductible, not the full limit. That reasoning does not apply to a life policy, which pays the face amount.