🔍 What Is a Hazard?

A hazard is anything that increases the chance of a loss or makes the loss more severe.

Hazards do not directly cause the loss —
they simply make the environment more risky.

Think of hazards as “risk boosters.”

🔥 Types of Hazards

Hazards are generally grouped into four types in insurance:

1️⃣ Physical Hazard

These are physical conditions that increase the likelihood of a loss.

✅ Examples

• Old or faulty electrical wiring

• Poor building construction

• Overloaded power sockets

• Worn-out tyres on a car

• Flammable liquid stored in a shop

💡 Impact on Premium

More physical hazards = higher premium or even policy rejection
because the chance of actual damage is higher.

2️⃣ Moral Hazard

This relates to a person’s honesty or intention.

A moral hazard exists when someone may deliberately cause loss or exaggerate it for financial benefit.

✅ Examples

• Burning own property to claim insurance

• Intentionally staging a car accident

• Hiding facts or lying in the proposal form

💡 Impact on Premium

Companies monitor moral hazards strictly.
Suspicious proposals may face:

• Higher premiums

• Detailed investigation

• Proposal rejection

Trust matters in insurance — a single fraud affects everyone’s premiums.

3️⃣ Morale Hazard

This is carelessness or indifference because someone knows they are insured.

Not cheating — just careless thinking like:

“Insurance will take care of it anyway.”

✅ Examples

• Leaving car unlocked casually

• Driving carelessly because the car is insured

• Not installing safety systems in a store

• Being negligent about health after buying health insurance

💡 Impact on Premium

Policies where morale hazard is high (like motor insurance) may have:

• Higher premiums

• Conditions deductibles

• Mandatory safety requirements (seatbelts, airbags, CCTV, etc.)

Insurance rewards responsibility, not negligence.

4️⃣ Legal Hazard

This relates to laws, legal environment, and regulation that may increase claim amounts.

✅ Examples

• Strict consumer laws increasing claim payouts

• Court trends favoring higher compensation

• Regions known for high liability awards

💡 Impact on Premium

When laws or courts tend to support bigger settlements, insurers charge more to cover stronger legal liability.

🎯 How Hazards Affect Premiums

In simple words:

More hazards → higher probability of claims → higher premium.

Insurance companies do not like uncertainty.
If they detect more danger, more risk, or more potential fraud — the premium goes up.

They may also impose conditions like:

• Fire alarms and extinguishers

• Medical check-ups

• Security cameras

• Anti-theft devices

• Deductibles

• Loadings due to occupation or environment

Hazards don’t just raise premiums — sometimes they may lead to policy rejection.

🌱 A Real-Life Example

Two restaurants apply for fire insurance:

🍽️ Restaurant A

• Fire extinguishers installed

• Staff trained in safety

• Wiring maintained regularly

• CCTV installed

🍽️ Restaurant B

• Uses gas cylinders carelessly

• No safety equipment

• Overloaded electrical circuit

• Records of previous minor fires

Who pays lower premium?
Restaurant A, because hazards are controlled.

💡 Advisor Tip

Always educate customers:

“Insurance premium depends not just on what you insure,
but how safely you maintain it.”

If clients reduce hazards, they save premium — and reduce future losses.

✅ Quick Recap

• Physical hazards = unsafe conditions

• Moral hazards = dishonest intention

• Morale hazards = careless attitude

• Legal hazards = laws increasing claim cost

• Higher hazards = higher premium

Insurance rewards people and businesses that manage risk responsibly.