Every insurance exam starts with the same building blocks. They are short definitions, but questions test whether you can tell them apart in a scenario.
Peril and hazard
A peril is the cause of a possible loss, such as fire or illness. If an insured breaks a leg in a skiing accident, the accident is the peril. A hazard is a condition that creates or increases the chance of loss. A moral hazard comes from a personal characteristic of a risk, such as bad habits, low integrity or poor financial standing, that makes a loss more likely or more severe.
What makes a risk insurable
- The peril must produce a definite loss that is not under the insured's control.
- There must be a large number of similar exposures subject to the same perils.
That second condition is what the law of large numbers relies on: the more exposures there are, the more closely actual results approach the expected results. That predictability is what lets an insurer price a policy.
Classifying applicants
A standard risk fits the standards on which normal premium rates are based. More favorable applicants may be rated preferred; less favorable ones substandard, often charged an extra premium (a "rating") because of impaired health or a hazardous occupation. An applicant whose risk is too great to cover on any terms is declined.
Insurable interest
A person buying insurance on someone's life must have an insurable interest in that life. For people closely related by blood or by law, that interest comes from love and affection; for others, it is a lawful and substantial economic interest in the insured's continued life, as New York's insurance law puts it.
Indemnity
Most health coverage reimburses actual costs. Fixed indemnity insurance instead pays a set dollar amount per day of hospitalization or per service, such as $100 a day, regardless of the actual expenses. Federal rules require a prominent notice that it is not a substitute for major medical coverage.