Your client bought a life insurance policy on her business partner five years ago. That partner just sold her share and left the company. Is the policy worthless? No, life insurance requires insurable interest at inception only. Getting that timing rule wrong costs you the point.
Pure risk has only two outcomes: a loss occurs, or it does not. A house burns or it stands. A breadwinner dies or lives. Insurance addresses pure risk only.
Speculative risk carries the possibility of loss, gain, or breaking even: stock investing, launching a startup, commodities trading. If the exposure is speculative, insurance is not the answer.
HIGH-FREQUENCY: The five-step risk management framework organizes every insurance conversation:
- Identification, catalog every exposure
- Analysis, estimate likelihood and severity
- Evaluation, rank exposures by priority
- Treatment, select a strategy
- Monitoring, review and adjust as circumstances change
The exam tests whether you can match a described activity to the correct step. Researching flood probability is analysis, not evaluation. Deciding between insurance and self-retention is treatment, not identification.
Common mistakes
- Reversing insurable interest timing. For life insurance, insurable interest is tested at inception only. For property/casualty, it must exist at the time of loss. Candidates who believe a life policy is void because the relationship ended get ex-spouse and business partner scenarios wrong.
- Mixing up subrogation and indemnity. A question about how much the insurer pays the policyholder is testing indemnity. A question about the insurer suing a negligent contractor is testing subrogation. Trap: "subrogation" when asked why the insured received $29,000 instead of $250,000.
- Confusing adhesion with utmost good faith. When a question describes an ambiguous policy provision and asks how a court interprets it, the answer is contra proferentem (adhesion), resolved against the drafter. Trap: "utmost good faith" when the question is about interpretation, not disclosure.
Bottom line
- Pure risk (loss or no-loss) is insurable; speculative risk (chance of gain) is not
- Treatment matrix: low-frequency/high-severity = insure; high-frequency/low-severity = retain; high-frequency/high-severity = avoid
- Risk management process: identify, analyze, evaluate, treat, monitor; treatment options are avoidance, reduction, retention, transfer
- Insurable interest timing: property/casualty at the time of loss; life insurance at inception only
Exam shortcut
When a scenario asks "which principle applies," trace the specific mechanism: how much collected (indemnity), insurer pursuing a third party (subrogation), contract validity (insurable interest), ambiguous term interpretation (adhesion/contra proferentem). Insurable interest timing: "Life = Lock-in at inception (both start with L). Property = at time of Loss (does the loss still hurt you?)." Indemnity faces the insured (how much do you get?).
The full lesson (about 2,105 words, 14 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C.17
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