HS 311 Fundamentals of Insurance Planning
Comprehensive Study Guide | 2026/2027
1. Risk Management Fundamentals
Risk: Uncertainty concerning the occurrence of a loss.
Pure risk: A situation involving only the possibility of loss or no loss. Insurance primarily
addresses pure risks.
Speculative risk: A situation in which there may be a loss, no change, or a gain.
Particular risk: A risk affecting an individual or relatively small group.
Fundamental risk: A risk that can affect large segments of society.
Peril vs. Hazard
• Peril: The cause of a loss.
• Hazard: A condition that increases the likelihood or severity of a loss.
Common hazard categories:
1. Physical hazard — physical condition increasing loss potential.
2. Moral hazard — intentional dishonesty or behavior that increases loss exposure.
3. Morale/attitudinal hazard — carelessness because the person has insurance.
Risk Management Techniques
Technique Meaning
Avoidance Eliminate the activity creating the exposure
Loss prevention Reduce the probability of a loss
Loss reduction Reduce the severity of a loss
Retention Accept responsibility for some/all of the risk
Noninsurance transfer Transfer responsibility through a contract
Insurance transfer Transfer financial consequences to an insurer
Insurable Risk Characteristics
An ideally insurable risk generally has:
• A sufficiently large number of similar exposure units
, • Accidental rather than intentional losses
• Definite and measurable losses
• Losses that can be calculated statistically
• Premiums that are economically reasonable
• A loss that is not excessively catastrophic to the insurer
High-yield distinction: Insurance works particularly well when insurers can use large numbers
of similar exposure units to estimate expected losses.
2. Insurance Principles
Law of Large Numbers
As the number of similar exposure units increases, actual losses tend to become more predictable
relative to expected losses.
Adverse Selection
Adverse selection occurs when people with higher-than-average risk are more likely to seek or
maintain insurance.
Indemnity
The principle of indemnity generally seeks to restore the insured financially to approximately the
position occupied before a covered loss rather than allowing the insured to profit from the loss.
Insurable Interest
An insurable interest exists when the policyholder would experience a financial or other
recognized loss if the insured event occurred.
Subrogation
Subrogation allows an insurer that has paid a covered loss to pursue recovery from a responsible
third party when applicable.
Utmost Good Faith
Insurance contracts depend heavily on truthful disclosure and good-faith dealings between the
parties.
, 3. Insurance Contracts
Important contract characteristics include:
• Conditional: The insurer's obligation depends on specified conditions being satisfied.
• Unilateral: The insurer makes the legally enforceable promise to pay covered benefits.
• Adhesion: The insurer generally prepares the contract, and the insured accepts or rejects
it.
• Aleatory: The values exchanged may be unequal because performance depends on an
uncertain event.
• Personal: Rights generally relate to the specific insured and contractual relationship.
Key Terms
Premium: Amount paid for insurance.
Deductible: Amount the insured generally pays before certain insurance benefits apply.
Policy limit: Maximum amount payable under specified coverage.
Exclusion: Circumstance, loss, or event that the policy does not cover.
Rider: An amendment that changes or adds policy provisions.
4. Insurance Company Operations
Underwriting
Underwriting is the process of evaluating an applicant's risk and determining whether and under
what terms the insurer will provide coverage.
Underwriters may evaluate:
• Age
• Health
• Occupation
• Claims history
• Property characteristics
• Driving history
• Financial information when relevant
• Other factors permitted under applicable law
Comprehensive Study Guide | 2026/2027
1. Risk Management Fundamentals
Risk: Uncertainty concerning the occurrence of a loss.
Pure risk: A situation involving only the possibility of loss or no loss. Insurance primarily
addresses pure risks.
Speculative risk: A situation in which there may be a loss, no change, or a gain.
Particular risk: A risk affecting an individual or relatively small group.
Fundamental risk: A risk that can affect large segments of society.
Peril vs. Hazard
• Peril: The cause of a loss.
• Hazard: A condition that increases the likelihood or severity of a loss.
Common hazard categories:
1. Physical hazard — physical condition increasing loss potential.
2. Moral hazard — intentional dishonesty or behavior that increases loss exposure.
3. Morale/attitudinal hazard — carelessness because the person has insurance.
Risk Management Techniques
Technique Meaning
Avoidance Eliminate the activity creating the exposure
Loss prevention Reduce the probability of a loss
Loss reduction Reduce the severity of a loss
Retention Accept responsibility for some/all of the risk
Noninsurance transfer Transfer responsibility through a contract
Insurance transfer Transfer financial consequences to an insurer
Insurable Risk Characteristics
An ideally insurable risk generally has:
• A sufficiently large number of similar exposure units
, • Accidental rather than intentional losses
• Definite and measurable losses
• Losses that can be calculated statistically
• Premiums that are economically reasonable
• A loss that is not excessively catastrophic to the insurer
High-yield distinction: Insurance works particularly well when insurers can use large numbers
of similar exposure units to estimate expected losses.
2. Insurance Principles
Law of Large Numbers
As the number of similar exposure units increases, actual losses tend to become more predictable
relative to expected losses.
Adverse Selection
Adverse selection occurs when people with higher-than-average risk are more likely to seek or
maintain insurance.
Indemnity
The principle of indemnity generally seeks to restore the insured financially to approximately the
position occupied before a covered loss rather than allowing the insured to profit from the loss.
Insurable Interest
An insurable interest exists when the policyholder would experience a financial or other
recognized loss if the insured event occurred.
Subrogation
Subrogation allows an insurer that has paid a covered loss to pursue recovery from a responsible
third party when applicable.
Utmost Good Faith
Insurance contracts depend heavily on truthful disclosure and good-faith dealings between the
parties.
, 3. Insurance Contracts
Important contract characteristics include:
• Conditional: The insurer's obligation depends on specified conditions being satisfied.
• Unilateral: The insurer makes the legally enforceable promise to pay covered benefits.
• Adhesion: The insurer generally prepares the contract, and the insured accepts or rejects
it.
• Aleatory: The values exchanged may be unequal because performance depends on an
uncertain event.
• Personal: Rights generally relate to the specific insured and contractual relationship.
Key Terms
Premium: Amount paid for insurance.
Deductible: Amount the insured generally pays before certain insurance benefits apply.
Policy limit: Maximum amount payable under specified coverage.
Exclusion: Circumstance, loss, or event that the policy does not cover.
Rider: An amendment that changes or adds policy provisions.
4. Insurance Company Operations
Underwriting
Underwriting is the process of evaluating an applicant's risk and determining whether and under
what terms the insurer will provide coverage.
Underwriters may evaluate:
• Age
• Health
• Occupation
• Claims history
• Property characteristics
• Driving history
• Financial information when relevant
• Other factors permitted under applicable law
