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Perils and hazards

Individuals tend to judge levels of risks differently depending on their cumulative wealth. The final components of risk are peril and hazard. In common, day’s usage, the words peril, hazards and risks are frequently used interchangeably. However, insurance may have very precise and distinct meanings.

Perils for a risk to become a loss there have to be a peril. A peril is the primary cause of loss. Thus, fire, theft, storm and death are perils. The occurrence of peril is beyond the control of anyone who may be involved.

Hazard, on the hand refers to a condition that influences the outcome of a loss arising from a given peril. Hence a hazard my increase or decrease the effect of a given peril. Before an insurance company decides whether or not to insure a risk and what a premium to charge, it must consider what kind of hazards exists. Under home insurance hazard may be classified as follows into three categories:

Physical hazards

Physical hazards, consists of those tangible or physical properties that increases chances of loss from perial. They may be classified as physical poor hazards and good physical feature. Poor physical hazards are those features that are likely to increase the chance of loss while the good the physical features are those which are likely to reduce the chance of loss. Examples of poor physical hazards in home insurance:

  • Type of construction e.g., building constructed of wood
  • Location of the building: The occupancy of the building and the quality of the building materials used in the construction.

Examples of good physical features are automatic sprinklers, concrete roof and firewalls.

Moral hazards

Moral hazards, refers to those human aspects or characteristics that may increase the probability of losses is also important to be aware of the attitude of the society towards the property of others and making claims. Where cases of malicious destruction of property of others are common and people are claim conscious, the society thus becomes a poor moral hazard.

Methods of handling risks under home insurance

Because of the heavy that risk to the individual and society, her has, over time evolved some methods of handling risk under home insurance. They will include:

  • Avoidance: In this method one refuses to accept the risk by keeping away from the one that exposes one to the risk.
  • Retention: Risks may be retained either intentionally or unintentionally. Intentionally occurs when an individual recognises the existence of a risk but decides to retain, while unintentionally is vice versa.
  • Reduction: Takes place when loss is anticipated and steps taken to ensure that its frequency is may be done either pre or post-loss.
  • Risk transfer: Is a mechanism by which the financial consequences of an event are shifted from one party to another.

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