General insurance

General Insurance Principles

• Insurance: The process of transferring risk from individuals/businesses to an insurance company, which pools risks among many policyholders to prevent financial burden on a single insured.
  • Key Concept: Insurance spreads financial responsibility across multiple policyholders.

Law of Large Numbers

• The foundation of insurance that relies on a large, homogeneous group of individuals.
• As the number of policyholders increases, insurers can predict losses more accurately, which leads to precise premium calculations.
  • Example: While individual life expectancy cannot be predicted, groups can provide statistical estimates.
  • Key Concept: A larger insured population results in more predictable loss calculations.

Insurable Interest

• A policyholder must have a direct financial stake in the person or property insured to receive a payout at the time of loss.
  • Types of Insurable Interest:
  1. Financial Interest: Ownership or monetary investment.
  2. Blood Relation: Coverage for family members.
  3. Business Relationship: Coverage related to partners or secured creditors.

Risk

• Definition: Uncertainty or chance of loss occurring.
  • Two Types of Risk:
  • Pure Risk: Insurable risk resulting only in loss.
  • Speculative Risk: Non-insurable risk that offers a chance of profit or loss (e.g. gambling).

Hazards

• Conditions that increase likelihood of a loss.
  • Three Categories of Hazards:
  • Physical Hazard: Structural risks (e.g., faulty wiring).
  • Moral Hazard: Risks from dishonest actions.
  • Morale Hazard: Carelessness due to insurance coverage.

Peril

• Specific cause of a loss:
  • Examples:
  • Life Insurance: Death.
  • Health Insurance: Medical costs from illness.
  • Property Insurance: Damage or destruction of property.
  • Casualty Insurance: Liability claims for injuries.

Loss

• Definition: Reduction/decrease/disappearance of value caused by a named peril.
  • Key Distinctions:
  • Risk: Uncertainty.
  • Hazard: Increases the likelihood of loss.
  • Peril: Actual cause of the loss.

Indemnity

• Principle of restoring the insured to their previous financial state without allowing for profit from a loss.
  • Example: If insured for $250,000, and damages cost $180,000, only $180,000 is paid out.

Subrogation

• Insurer's right to recover funds from a third party responsible for loss.
  • Prevents the insured from receiving duplicate payments.

Property and Casualty Insurance Concepts

• Accident vs. Occurrence:

  • Accident: Sudden event causing damage.
  • Occurrence: Continuous exposure leading to loss.

• Direct vs. Indirect Loss:

  • Direct Loss: Immediate physical damage.
  • Indirect Loss: Secondary losses resulting from a direct loss.

• Named Peril vs. Open Peril:

  • Named Peril: Covers only listed perils.
  • Open Peril: Covers all risks except those excluded.

Negligence & Legal Liability

• Negligence: Failure to act with reasonable care leading to harm.
  • Elements of Negligence:
  1. Legal Duty.
  2. Breach of Legal Duty.
  3. Proximate Cause.
  4. Damages/Loss.
  • Legal Terms:
  • Contributory Negligence: Claimant cannot recover if partly at fault.
  • Comparative Negligence: Compensation reduced based on fault.
  • Absolute Liability: No proof of negligence needed.
  • Strict Liability: Manufacturers liable for defective products.
  • Vicarious Liability: Employers are responsible for employees’ actions.

Theft-Related Terms

• Burglary: Unauthorized forced entry.
• Robbery: Theft using intimidation.
• Theft: Any act of stealing.
• Mysterious Disappearance: Property vanishes without explanation.

Damages

• Compensation awarded for injury or damage, categorized into:
  • Compensatory Damages: Tangible losses (special and general damages).
  • Punitive Damages: Additional damages to punish a wrongdoer.

Loss Valuation

• Multiple methods for valuing a loss:
  1. Actual Cash Value (ACV): Current Replacement Cost - Depreciation.
  2. Replacement Cost: Full replacement cost, no depreciation.
  3. Market Value: Price a willing buyer would pay.
  4. Stated Value: Pre-agreed coverage listed in the policy.
  5. Salvage Value: Estimated residual value of an asset at end of life.

Liability and Limits of Liability

• Types of Liability:

  1. Absolute Liability: Applies to hazardous activities.
  2. Strict Liability: Related to product liability.
  3. Vicarious Liability: Liability transferred to another.

• Limits of Liability:

  • Types:
  1. Per Occurrence: Limit for a single event.
  2. Per Person: Maximum for one individual.
  3. Aggregate Limit: Total for the policy period.
  4. Split Limits: Separated amounts for different losses.
  5. Combined Single Limit: Total for all claims per occurrence.

Other Related Insurance Concepts

• Proximate Cause: Unbroken chain of events leading to damage.
• Deductible: Out-of-pocket cost before coverage starts.
• Coinsurance: Required minimum percentage of coverage.
  • Formula: (Insurance Required ÷ Insurance Carried) × Loss Amount.
• Deposit Premium Audits: Estimated premium adjustments.
• Certificate of Insurance: Proof of insurance coverage details.