CARD T014
Risk
Risk is uncertainty about loss. Pure risk allows loss or no loss; speculative risk also offers an opportunity for gain.
Pure Risk: A situation with possible loss or no loss, but no opportunity for gain. An accidental injury is an example.
Speculative Risk: A situation with possible gain as well as loss. Buying stock hoping its price rises is an example.
How it works
For licensing exams, distinguish an accidental financial setback from a decision made in pursuit of profit. Illness or accidental injury can create pure risk. Buying shares to profit from a price change creates speculative risk. Insurance generally addresses pure risks, but not every pure risk is insurable: the loss must also meet the insurer’s and contract’s requirements. [1] [10]
Mina may incur medical bills if she becomes ill, or no such bills if she stays well: pure risk. Her investment may rise or fall in value: speculative risk.
Pure does not mean small or harmless. Speculative does not mean the outcome is certain.
CARD T015
Peril
A peril is the event or cause that produces a loss.
How it works
Ask what caused the loss. Then distinguish that cause from a condition that made it more likely or severe. The condition is a hazard. Risk describes the uncertainty before the event; the loss is its financial consequence. A peril can cause a loss even when the resulting expense is not covered by a particular policy. [1] [10]
A damaged stair makes a fall more likely. The accidental fall causes an injury and medical bills. The damaged stair is the hazard; the accident is the peril; the bills are the financial loss.
Do not call every unfavorable condition a peril. Separate cause, contributing condition, and financial result.
CARD T016
Hazard
A hazard is a condition that increases the likelihood or severity of loss.
Physical Hazard: A tangible condition that increases the chance or severity of loss. A damaged staircase can increase injury risk.
Moral Hazard: Dishonesty that increases insurance loss exposure. Submitting an invented claim is an example.
Morale Hazard: Carelessness arising from indifference to loss. Someone may take fewer precautions because they expect insurance to pay.
How it works
Physical hazards are tangible conditions, such as a damaged stair. Moral hazards involve dishonesty, such as inventing a claim. Morale hazards involve indifference or carelessness, such as abandoning precautions because insurance is expected to pay. In exam terminology, intentional deception separates moral from morale. Some outlines also use legal hazard for aspects of the legal environment that increase loss exposure. [1] [10]
A loose handrail is physical. Submitting a false injury claim is moral. Ignoring the handrail because “insurance will handle it” illustrates morale.
Moral = dishonesty. Morale = carelessness or indifference. The peril is the accident or illness, not the condition increasing its likelihood.
APPLY THE TERMS
Practice questions
Select an answer, then check it to see why each option is right or wrong.
T014 · Risk
0 of 3 answered
T015 · Peril
0 of 3 answered
T016 · Hazard
0 of 3 answered
Sources & further reading
Original explanations and practice scenarios informed by the following regulator resources. State examples are not presented as nationwide deadlines or requirements.