In terms of risk assessment, what is a hazard?

In risk assessment, a hazard is defined as a circumstance that increases the likelihood of a loss occurring. Hazards are often classified into several categories, such as physical, moral, and legal hazards, each contributing to the risk profile of an insurance policy. Understanding hazards is crucial for underwriters since identifying and evaluating these circumstances allows insurers to determine the risks associated with insuring certain individuals or entities, assess premiums, and implement risk mitigation strategies.

For example, a physical hazard could be an unsafe building structure, while a moral hazard might arise from an insured individual who may take reckless actions because they know they are covered by insurance. Therefore, recognizing and analyzing hazards helps underwriters calculate the probability of losses and make informed underwriting decisions.