General Insurance Concepts
Core vocabulary
Risk is uncertainty about loss; peril is the cause of loss; hazard increases the chance or severity of loss. Pure risk involves only loss or no loss and is insurable; speculative risk involves gain or loss and is generally not insurable. Insurance transfers risk to a pool. The law of large numbers helps predict losses across many similar exposure units, while adverse selection occurs when poorer-than-average risks seek coverage. Insurable interest is a financial or love-and-affection interest; for life insurance it must exist at policy inception, not at death.
Contract concepts
Insurance contracts are contracts of adhesion, aleatory, unilateral, conditional, and based on utmost good faith. A representation is believed true; a warranty is a promise that must be literally true. Waiver is voluntary surrender of a known right; estoppel prevents inconsistent positions. Indemnity restores the insured to approximately the pre-loss financial position, subject to limits. Subrogation lets the insurer pursue a responsible third party after paying a claim.
Traps
Do not confuse hazard with peril: icy stairs are a hazard; a fall is the peril. Do not say insurable interest must continue until death for life insurance. Do not treat a conditional receipt as always providing immediate coverage; coverage may depend on insurability at the time of application or medical exam.
Rule of thumb
Ask: Is the risk pure or speculative? Is there insurable interest now? Did the insurer waive a known right? For life insurance, check insurable interest at application and ownership rights separately.
Worked example
An applicant applies for life insurance, pays the first premium, and receives a conditional receipt. The applicant dies before the underwriter approves the policy. Coverage depends on the receipt's terms and whether the applicant was insurable under the insurer's rules-not simply on payment alone.