What are "peril" and "hazard" in insurance?

In the context of insurance, peril and hazard have specific and distinct meanings that are fundamental to understanding risk assessment and management.

Peril refers to the specific event or circumstance that can cause a loss or damage. Examples of perils include fire, theft, windstorm, and flood. Insurers provide coverage for various perils through their policies, meaning that they protect against losses that arise from these specific events.

Hazard, on the other hand, relates to a condition or situation that increases the likelihood or probability that a peril will result in a loss. Hazards can be classified into different categories, such as physical hazards (conditions related to the property itself), moral hazards (the dishonesty of the insured), and morale hazards (carelessness or indifference to loss). Essentially, while perils outline what can cause a loss, hazards describe factors that make those perils more likely to happen.

The selection highlights the important relationship between peril and hazard: peril indicates the actual risk of loss, while hazard serves to increase the likelihood of that risk manifesting. Therefore, the correct answer accurately captures these definitions and their implications within the context of insurance.