Different Types Of Hazards In Insurance

Insurance always deals in risks. Risk is the probability of happening of an unforeseen event or contingency which is never desired. This probability of happening of the undesired event may become more certain or prominent if the subject-matter of insurance presents some peculiar characteristics facilitating the causation of the event. The cause of such event is termed as Peril. Sometimes the causation of the event may not be due to some peculiar characteristics of the subject-matter itself but may be due to the peculiar character of the insured. Hazard in fact indicates a danger (or risk), which danger influences the possible happening of the insured event, that is to say, which indicates the aggravation of the risk so as to make it somewhat different than normal.

Difference Between Peril And Hazard With Examples

More simply, a risk is the possibility of a loss, but a peril is a cause of loss. A hazard is a condition that increases the possibility of loss. For instance, fire is a peril because it causes losses, while a fireplace is a hazard because it increases the probability of loss from fire. 

It is the qualitative exposure of the risk or the gradation thereof, a proper analysis or assessment of which can only ensure proper and scientific underwriting. It is the degree of danger involved in the subject-matter of insurance which may accelerate the causation of the insured event, or a situation or state of mind of the insured which may help in bringing about the insured event. Since hazard indicates the bad elements in a risk proposed, a detailed knowledge thereof can only influence the decision of a prudent underwriter in deciding whether to accept or reject a risk and if to accept, at what rates, terms, premiums and conditions. Basically, there are two types of Hazards in insurance, viz. physical hazards and moral hazards.

(a) PHYSICAL HAZARDS : Physical hazards indicate those dangers of the subject-matter of insurance which can be ascertained or identified by mere inspection of the risk. The hazards are apparent in the subject-matter itself. The dangers are visible from the very nature, construction and situation of the subject-matter. Some examples in the various branches of insurance will make the position further clear.

(b) MORAL HAZARDS : Moral hazard indicates those dangers which relate to character, integrity “and mental attitude of the insured. These are not visible and cannot be identified or ascertained by mere inspection of the risk or the subject-matter of insurance. These in fact refer to behavior and attitude of the insured, or their employees towards the subject-matter of insurance from the view point of encouraging or discouraging the causation of the insured event. In every risk an element of moral hazard, may be in varying degree, is always present.

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