Understanding Hazards and Risk

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Understanding Hazards and Risk

Risk can be categorized into two different types:

Speculative and Pure Risk

Speculative Risk: A category of risk that is undertaken with no certainty of either gain or loss, this is a conscious choice that is made and cannot be insured

Pure Risk: a category of hazard in which the outcomes are a loss or no loss, and there is no opportunity for gain, however, this type of risk can be insured.  Examples would include premature death, identity theft, and career-ending disabilities

Exposure

Exposure is defined as the extent to which a person, item, or organization is open to damage or loss which is expressed in dollars or units and is one of the determining factors in issuing a policy and determining the cost of premiums.

Examples of exposure would be California’s high exposure to earthquakes or Florida’s high exposure to hurricanes.

Hazard

A hazard is a condition that increases the likelihood or severity of a loss, these could be things like smoking or a record of drunk driving

The thing to remember is the more hazards you have the higher your exposure

Peril

A peril is the actual cause of loss or damage these could be things like windstorm, theft, fire, vandalism, flood, etc.

Insurance Policies can be written on either a Named Peril or Open Peril basis

Named Peril policies are policies that list each peril that is covered

Open Peril policies are policies that cover all perils except those specifically excluded