What is true about a hazard in insurance?

In the context of insurance, a hazard refers to a condition or situation that increases the likelihood of a loss occurring. This could be a physical hazard, such as a defective electrical system in a building, or a moral hazard, where a person's behavior changes after obtaining insurance, possibly leading to increased risk-taking.

When determining insurance premiums and coverage, understanding hazards is crucial because they directly relate to the risk that the insurer faces. By identifying a hazard, insurers can assess the potential for loss and adjust their policies accordingly. Hence, recognizing that a hazard increases the probability of loss helps both insurers and insured parties manage and mitigate risks effectively. This understanding is fundamental in underwriting and in the overall risk management process within the insurance industry.