What is an Insurance hazard?
Insurance Hazard means the condition or situations that are likely to increase the chances of a loss arising from a peril.
For example, let’s say the summer season arrives, and that will increase the occurrence of a wildfire in your state.
Rainy season comes, and there is a flood in your area. Now, in both cases, if your business production or warehouse is in a place, these happen often. Then the risk is higher for insuring your business because floods and wildfires are hazards that put your insured property at greater risk of being damaged.
Similarly, if you want health care insurance and are a smoker, your premium will be higher. Smoking is a hazard that will increase your chances of cancer. Insurance deals with risks, i.e., the probability of an unforeseen event or contingency that 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.
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.
Whatever it is, this 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.
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.
The degree of danger involved in the subject matter of insurance may accelerate the causation of the insured event or a situation or state of mind of the insured which may help bring 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.
Types of Insurance Hazards in Insurance
Two types of Insurance Hazards are;
- Physical Hazards of Insurance.
- Moral Hazards of Insurance.
Physical Hazards of Insurance.
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 insurance branches will clarify the position further.
Examples of Physical Hazard of Insurance.
Hazards of Marine Insurance
- The nature of the cargo, whether these are more susceptible to damage, e.g., fragile nature of the cargo like fish, egg, etc., or glass items which are more prone to breakage.
- Quality of packing of the goods. Bad-quality packing creates more losses.
- The voyage itself may be hazardous, particularly during the monsoon period in our country.
- Nature, construction, age, classification, and condition of a vessel. For example, an over-aged vessel, a vessel in bad shape, or an unseaworthy condition presents higher risks and is more affiliated with accidents.
Hazards of Fire Insurance
- Nature and construction of the building. Materials used in the construction and whether such materials are of combustible or non-combustible nature.
- The system of lighting and heating of the premises. Whether the electrical wirings are in good shape or worn out.
- Whether the premises are kept clear, Rubbishes scattered here and there help the fire to spread.
- Indiscriminate smoking throughout the premises, particularly if it is a factory where inflammable materials are required to be kept, is an example of a physical hazard.
- Whether the risk is situated near the fire brigade and whether internal firefighting facilities are there on the premises.
- Nature of occupation of the premises, e.g., if it is a petroleum, kerosene, or chemical trade, the hazard will be greater.
- Nature, construction, and the occupation of the adjoining premises because the fire may travel from the adjoining premises to the insured premises.
Hazards of Life Insurance
- Age and condition of health of the proposer.
- The family history of any hereditary disease, e.g., cancer, tuberculosis, blood pressure, heart disease, etc.
- History of any illness of the proposer.
- The occupation of the proposer, for example, publicans, factory workers, mine workers, etc., are more hazardous from a life insurance point of view.
Hazards of Accident Insurance
Examples will vary depending on the type of insurance;
- In motor insurance, the age, make, and condition of previous accidents are all examples of physical hazards,
- In burglary insurance, the construction of the house, condition of doors and windows, existence or otherwise of burglar alarms, nature of contents, reputation or otherwise of the area are all examples of physical hazard.
- In personal accident insurance, physical hazard relates to the age, occupation, health, physical condition, etc., of the proposer.
- In liability insurance, the natural construction, occupation of the premises, and history of past liability are all instances of physical hazard.
- In property insurance, the concept follows the pattern of fire insurance.
Moral Hazards of Insurance.
Moral hazard indicates those dangers which relate to the 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 the behavior and attitude of the insured or their employees towards the subject matter of insurance from the viewpoint of encouraging or discouraging the causation of the insured event.
In every risk, an element of moral hazard may be, in varying degrees, always present.
There may be an example of first-class moral hazard where the insured gives maximum cooperation to the insurers by materializing their suggestions aimed at risk improvement or where the insured himself is very strict and particular in maintaining the property or premises with such care that the possibility of the happening of the insured event is reduced.
Examples of bad moral hazards are also there where the insured fraudulently and intentionally brings about an insured event with the sole motive of making money out of insurance at the cost of insurers.
Examples of Moral Hazard of Insurance.
Carelessness
It is an implied condition of all insurance contracts that the insured must take all reasonable precautions in averting or minimizing a loss.
Carelessness is the cause of most accidents, and when the insured behaves carelessly, an unsatisfactory moral hazard is created.
Difficult Insured
An insured may always be uncompromising and litigation-minded. He may refuse to accept the amount offered by insurers and press for an unreasonable amount.
Fraud
A very unsatisfactory moral hazard exists when a person wants to take out a policy with the intent to make a profit.
Over insurance
Excessive over-insurance is apparently an instance of a bad moral hazard.
Maintenance
Bad administration and resultant shabby maintenance of the property premises is an examples of bad moral hazards.
It is also an example of a physical hazard since bad maintenance reflects in the untidy atmosphere around, which can be physically seen.
Distinction Between Physical and Moral Hazards of Insurance.
Whatever has been said so far sufficiently distinguishes one from the other. However, the students should note the following:
- Physical hazard relates to the subject matter of insurance, whereas moral hazard relates to the character, integrity, and mental attitude of the insured.
- Physical hazards can be seen, assessed, and rated accordingly, but moral hazards cannot be seen, assessed, or rated accordingly.
- Whilst physical hazards can be effectively dealt with by applying excess, franchise, loading or other conditions, moral hazards cannot be easily checked or controlled by such methods. Cautious and selective underwriting is the only possible solution.
