South Carolina Life Insurance Practice Exam

What are conditions that increase the chance of a loss known as?

1. Risks

2. Hazards

3. Perils

4. Exposures

The correct answer is: Hazards

The conditions that increase the chance of a loss are known as hazards. Hazards can be understood as factors or situations that make a loss more likely to occur. There are different types of hazards including physical hazards, which pertain to tangible conditions such as slippery floors or faulty equipment, and moral hazards, which involve subjective factors like an individual’s behavior influencing the risk of loss. Understanding hazards is crucial in the context of risk assessment and management in insurance. They directly contribute to the likelihood of perils occurring, which are the actual events that can cause loss, such as theft, fire, or death. Differentiating between hazards and perils helps in properly evaluating risks and determining appropriate insurance coverage and premiums. Meanwhile, risks generally refer to the overall uncertainty regarding loss, exposures indicate the extent to which an entity is subject to loss, and perils specifically denote the events leading to the loss itself.