Physical and Moral Hazards in insurance
An insurance hazard refers to a condition or situation that increases the likelihood of a loss, which could lead to a potential claim on a car or home insurance policy. Insurance companies assess and manage these hazards to determine the risk associated with providing coverage to an individual, property, or business. There are several types of insurance hazards: Physical, Moral, Morale and Legal Hazards.
What is a Physical Hazard?
Physical Hazard: This type of hazard arises from the actual physical characteristics or conditions of the insured property that increase the likelihood of a loss. For example, a poorly maintained building with faulty wiring presents a higher fire risk, making it a physical hazard.
What is a Moral Hazard?
Moral Hazard: Moral hazard refers to the potential change in behaviour of the insured party due to the presence of insurance coverage. When someone knows they are covered by insurance, they might become less cautious about preventing losses or intentionally cause a loss to collect insurance benefits. For instance, if a person intentionally damages their property to receive a payout, it’s considered a moral hazard.
What is a Morale Hazard?
Morale Hazard: Morale hazard is similar to moral hazard but is more related to a change in attitude or behaviour due to being insured. This could include being less attentive to risk because of insurance coverage, leading to increased chances of accidents or losses.
What is a Legal Hazard?
Legal Hazard: Legal hazards arise from changes in laws, regulations, or legal environments that might impact the potential for losses or claims. For instance, changes in liability laws could increase the likelihood of lawsuits and claims against businesses or individuals.
Insurance companies analyse these hazards to determine the appropriate premium rates, coverage limits, and terms for their insurance policies. By understanding and managing these hazards, insurers aim to provide fair coverage while maintaining a sustainable business model that accounts for potential losses. You may also be interested in learning about Perils in insurance.