A hazard is anything that increases the likelihood or severity of a loss. It doesn't cause the loss directly—that's a peril—but it makes a peril more likely to happen or worse when it does. Underwriters spend much of their time identifying hazards, because they help predict how risky a person or property is to insure.

The three types of hazard

This breakdown is heavily tested:

• Physical hazard — a tangible condition that increases risk, like icy steps, frayed wiring, or storing flammable chemicals.
• Moral hazard — a dishonest tendency that increases risk, such as someone with a history of faking claims or who might deliberately cause a loss to collect.
• Morale hazard — carelessness or indifference because insurance exists, like leaving your car unlocked because "the insurance will cover it." (Think: morale = a lax attitude.)

Why it matters

Hazards drive underwriting and pricing. An applicant with more or worse hazards is likelier to file a claim, so insurers either charge more, attach conditions, or decline the risk. Spotting hazards is how an insurer decides whether and how to take on a risk.

A simple example

A homeowner stacks oily rags next to a furnace. The peril is fire; the oily rags are a physical hazard that make that fire more likely. If the same homeowner also stopped repairing broken smoke detectors because "the policy will pay anyway," that's a morale hazard.

Don't confuse it with…

A peril is the cause of loss (the fire itself). A hazard merely increases the odds or impact of that peril. Keep the trio straight: moral = dishonesty, morale = carelessness/indifference, physical = a tangible condition.

On the exam

Expect a scenario asking you to label the hazard type. The classic trap is moral vs. morale—remember moral hazard involves intentional dishonesty, while morale hazard is an indifferent or careless attitude born from having coverage.