Principles of insurance

The General Insurance core is cross-cutting — it appears on every producer exam regardless of line. Master it first; it makes Property, Casualty, Life, and Health much easier. Everything here is STABLE (NAIC-standardized concepts).

Risk

Risk = uncertainty about loss. Two kinds:

• Pure risk — only the possibility of loss or no loss (a house burns down or it doesn’t). Only pure risk is insurable.
• Speculative risk — possibility of loss, no change, or gain (gambling, investing). Not insurable.

Peril vs hazard vs loss

Term	Definition	Example
Peril	The cause of a loss.	Fire, theft, collision, windstorm.
Hazard	A condition that increases the chance or severity of a loss.	(see below)
Loss	The reduction in value that results.	The burned house.

Three types of hazard (a classic exam item):

• Physical hazard — a tangible condition (icy steps, oily rags, a frayed wire).
• Moral hazard — dishonesty: the insured may cause/exaggerate a loss for gain (arson for the insurance money).
• Morale hazard — carelessness: an indifferent attitude because insurance exists (“I’m covered, so why lock the door?”).

Memory hook: moRAL = fRAud (intent to cheat); moRALE = caRELess (just doesn’t care).

Elements of an insurable risk

For an exposure to be commercially insurable, it should be:

1. Due to chance — accidental, outside the insured’s control.
2. Definite and measurable — clear cause, time, place, and amount.
3. Predictable — a large number of similar exposures so losses can be estimated (see law of large numbers).
4. Not catastrophic — not so widespread it would bankrupt the insurer (why war and floods are often excluded/handled specially).
5. Economically feasible — the premium is affordable relative to the potential loss.

Law of large numbers

The more similar exposure units an insurer pools, the more accurately it can predict losses. This is the statistical engine that lets insurers price risk. It’s why insurers want lots of homogeneous exposures. STABLE

Adverse selection

Adverse selection = those most likely to have a loss are the most likely to seek (and keep) insurance. Left unmanaged, it skews the pool toward bad risks and breaks the pricing. Insurers fight it with underwriting (risk selection), classification, and policy provisions. This is the central problem underwriting exists to solve.

Risk-management methods

How any party (not just insurers) can handle risk — remember “STARR”:

• Sharing — spread it (partnerships, pooling).
• Transfer — shift it to another party. Insurance is risk transfer.
• Avoidance — don’t engage in the risky activity at all.
• Retention — keep it (self-insure, deductibles).
• Reduction — lower frequency/severity (sprinklers, seatbelts).

Three doctrines that run through everything

• Indemnity — restore the insured to the same financial position as before the loss; no profit from a loss. (Most property/casualty policies are contracts of indemnity.)
• Insurable interest — you must stand to suffer a genuine financial loss to insure something. (Required to prevent wagering; when it must exist differs: property = at time of loss; life = at policy inception.)
• Utmost good faith — both parties deal honestly and disclose material facts; the basis for the doctrines of representations, warranties, and concealment (see 03 Contract law).

Why this matters downstream

These principles are the vocabulary of underwriting (risk selection, classification, adverse selection) and of every policy you’ll read. They’re also the foundation for the Glacis underwriting story — better evidence → better selection → less adverse selection → lower loss ratio.

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