Peril is the actual cause of a loss (such as a heart attack).
Hazard is any condition (such as smoking) that increases the possibility of a loss or peril. The underlying cause of a loss may result from physical hazards or moral hazards.
To control the level of risk it assumes, insurance companies are concerned about hazards that increase the likelihood that a peril will strike or increases the potential severity of the loss.
Physical Hazards – tangible circumstances such as a heart condition or a high-risk hobby that might cause a company to decline a risk.
Moral Hazards – are intentional losses, such as fraudulent claims, which companies try to screen out with probationary periods, exclusions and other underwriting devices.
Morale Hazards – occur when an insured ignores the financial impact of a loss because the company pays for it. Companies control this hazard with deductibles, coinsurance and other policy limitations.
Chapter 1 - Chart D
