In conjunction with the two different types of risk (speculative and pure), there are two other concepts to become familiar with: (1) Perils and (2) hazards.
A peril is the cause of a risk. A peril is the immediate specific event causing loss and giving rise to risk. When a building burns, fire is the peril.
A hazard is the source of danger. The hazard is the underlying factor behind the peril that leads to the probability of a particular loss to the insurer. It is the active ingredient that could create a peril, which could then lead to a particular loss event.
To determine the exposure to risk is to ask, "How vulnerable is the insured item to loss?"
Study the three types of hazards: (1) Physical, (2) moral, and (3) morale.
All three will be important for you to remember.
Distinguishing physical hazards from the other two (moral and morale) is relatively easy. However, making the distinction between moral and morale hazards may not be so easy.
Physical Hazards
Physical hazards can be described as being of a physical nature - quite self-explanatory. For instance, if a person is being treated for cancer, the disease is the physical endangerment that will lead to loss.
Moral Hazards
Moral hazards are those tendencies individuals have that increase the chance of suffering a peril, such as how the habit of smoking can lead to emphysema, or how drug addiction can lead to physical impairment and death. Moral hazards are typically habits with little regard toward impending responsibilities for those lifestyles, such as a poor credit rating or dishonest business practices. Moral hazards are typically habits with little regard toward impending responsibilities (i.e., a lack of morals).
For underwriting purposes (which we will get into extensively in Lesson 5, Life Insurance Underwriting and Policy Issuance), moral hazards are considered the effect of personal reputation, character, associates, personal living habits, financial responsibility and environment, as distinguished from physical health, upon an individual's general insurability.
Moral hazards are habits or lifestyles.
Morale Hazards
Morale hazards differ from moral hazards in the way that hazards could develop into a loss situation. A morale hazard stems from an individual's state of mind such as road rage. It is usually a temporary lapse in judgment. The key to distinguishing between moral hazards and morale hazards is that morale hazards stem from an attitude or state of mind at a given moment causing "indifference" to loss.
Morale hazards can arise from indifference to loss because of the existence of insurance.
Morale hazards are mental tendencies.
- What are the key differences between the three hazards?
Consider the examples the Florida study manual gives on page 9, Perils and Hazards:
"For example, when a building burns, fire is the peril. When a person dies, death is the peril. When an individual is injured in an accident, the accident is the peril. When a person becomes ill from a disease, the disease is the peril."
Regarding the first example (fire): "...when a building burns, fire is the peril." In this instance, perhaps faulty wiring could've been the hazard that gave rise to the risk of the fire (peril).
Regarding the second example (death): "...when a person dies, death is the peril." In this instance, falling from a ladder could've been the hazard that contributed to the death (peril).
Regarding the third example (accident): "...when an individual is injured in an accident, the accident is the peril." In this instance, road rage could've been the hazard that contributed to the accident (peril).
Regarding the fourth example (disease): "...when a person becomes ill from a disease, the disease is the peril." In this instance, smoking could've been the hazard that contributed to the disease (peril).
