General Insurance Principles Flashcards

The principle of indemnity in insurance means:

Answer: The insured should be restored to the same financial position they were in before the loss, no better and no worse

Indemnity means the insurance payment should restore the insured to their pre-loss financial position — not provide a windfall or a penalty.

'Subrogation' in insurance allows the insurer to:

Answer: Recover money paid to the insured from the responsible third party

Subrogation transfers the insured's right to sue a negligent third party to the insurer after the insurer pays the insured's claim, allowing the insurer to seek reimbursement.

What does 'insurable interest' require?

Answer: The insured must stand to suffer a financial loss if the insured event occurs

Insurable interest requires that the policyholder would suffer a genuine financial loss if the covered property is damaged or the covered event occurs, preventing insurance from becoming a gambling instrument.

An 'aleatory' contract, such as an insurance policy, is one in which:

Answer: One party may receive considerably more or less than they give, depending on chance

Insurance is an aleatory contract because the values exchanged are unequal and depend on an uncertain future event — the insured pays premium but may receive a large claim payment or nothing at all.

The 'law of large numbers' is the statistical principle that allows insurers to:

Answer: Predict losses with greater accuracy as the number of similar exposure units increases

The law of large numbers states that as the sample size increases, the actual loss experience approaches the expected (predicted) loss rate, giving insurers greater predictability.

A 'binder' in property and casualty insurance is:

Answer: A written or oral agreement that provides temporary coverage until a formal policy is issued

A binder is a temporary contract of insurance that provides immediate coverage while the formal policy is being processed and issued.