General Insurance Concepts and Principles
Risk and insurable risk
Insurance transfers pure risk (chance of loss only) rather than speculative risk (chance of gain or loss). Insurable exposures are ideally accidental, measurable, definite in time and amount, large enough to matter, and spread over many similar units so the law of large numbers makes losses predictable. Adverse selection - attracting poor risks - is controlled through underwriting and pricing.
Core vocabulary
A peril is the cause of loss (fire, windstorm, theft). A hazard increases the chance or severity of loss: physical (icy steps), moral (dishonesty, fraud), morale (carelessness, because insurance exists), and legal (court awards). Do not confuse the two; questions routinely swap them.
The six characteristics of insurance contracts
Utmost good faith (representations must be truthful, material misrepresentation or concealment voids coverage), indemnity (restore, never profit), insurable interest (must exist at time of loss for property, at time of application for life), subrogation (insurer steps into the insured's shoes after paying; an insurer can never subrogate against its own insured), adhesion (written by the insurer, ambiguities construed against the drafter), and aleatory (unequal exchange of values).
Agency and authority
A producer binds the insurer through express, implied, and apparent authority. An insurer that accepts premiums or benefits from an unauthorized act may be bound by waiver and estoppel.
Worked example
A 5-year-old roof with a 20-year life has a replacement cost of 20,000 dollars. Depreciation is 5/20, or 25 percent, so actual cash value = 15,000 dollars. Replacement cost pays the full 20,000 dollars only after repairs are completed. Deduct the policy deductible from the payable amount, not before computing the coinsurance or valuation step.