Page 290 - IC38 GENERAL INSURANCE

Hazard

We have seen above that mere exposure to a peril need not cause a loss. Again,
a loss need not be severe. The condition or conditions which increase the
probability of a loss or its severity, and thus impact(s) the risk is known as
hazard. When insurers make an assessment of the risk, it is generally with
reference to the hazards to which the asset is subject.

Let us now give some examples of the link between assets, peril and hazards

Asset Peril Hazard
Life
Factory Cancer Excessive Smoking
Car
Cargo Fire Explosive material left Unattended

Car Accident Careless driving by driver
Storm
Water seeping in cargo and spoiling; Cargo not
packaged in waterproof containers

Important

Types of hazards

a) Physical hazard is a physical condition that increases the chance of loss.

Example

i. Defective wiring in a building

ii. Indulging in water sports

iii. Leading a sedentary lifestyle

b) Moral hazard refers to dishonesty or character defects in an individual that
influence the frequency or severity of the loss. A dishonest individual may
attempt to commit fraud and make money by misusing the facility of
insurance.

Example

A classic instance of moral hazard is purchasing insurance for a factory and then
burning it down to collect the insurance amount or buying health insurance
after onset of a major ailment.

c) Legal hazard is more prevalent in cases involving a liability to pay for
damages. It arises when certain features of the legal system or regulatory
environment can increase the incidence or severity of losses.

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