Definition
Hazard
A hazard is a condition or circumstance that increases the probability or severity of a loss from a peril.
Hazards are classified as physical (a tangible condition like faulty wiring or a flood-prone location), moral (dishonesty or intent to defraud) and morale (carelessness arising from being insured). Underwriters assess hazards to price risk and decide acceptance.
While a peril is the cause of loss, a hazard merely makes that loss more likely or worse. For example, smoking is a hazard that increases the peril of illness. Identifying and pricing hazards is central to underwriting and to setting fair premiums.
Related terms
- PerilA peril is the actual cause of a loss, such as fire, flood, theft, accident or illness, against which insurance provides protection.
- UnderwritingUnderwriting is the process by which an insurer evaluates a risk, decides whether to accept it, and on what terms and premium.
- Moral HazardMoral hazard is the increased risk that arises when being insured changes a person's behaviour, making them less careful or more prone to claim.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.