1/G - Types of Hazards and Fraud

Question 1

Types of Hazards

Answer 1

Hazards increase risk for the insurer.

Various types of hazards:

• Morals
• Morale
• Physical
• Legal

Question 2

Moral Hazard

Answer 2

• Results from the policyholder’s deliberate decision
• Involves reckless behavior because of the financial security offered by insurance
• Type of “behavioral hazard”

Question 3

Morale Hazard

Answer 3

Morale Hazard:

• When insured acts differently because of the comfort that insurance protection provides
• Another form of behavioral hazard

Moral vs. Morale:

• Moral hazards involve deliberate, immoral behavior
• Morale hazards involve indifference and carelessness

Question 4

Physical Hazard

Answer 4

A physical condition that increases the chance of a loss

Types of Physical Hazard:

• Environmental: potholes in the road
• Material: asbestos in an old house
• Operational: poorly maintained engine
• Occupational: working in a coal mine

Question 5

Legal Hazard

Answer 5

Increased chance of loss due to legal action

Examples:

• Laws that force insurers to provide coverage for risks they would not normally cover
• A legal system that favors those who file lawsuits for monetary gain

Question 6

Fraud

Answer 6

Deceiving an insurer to profit from an insurance policy

• Categorized as “hard” or “soft”
• Usually involves misrepresentation or concealment

Question 7

Hard and Soft Fraud

Answer 7

Hard fraud
Deliberately planning or faking a loss

Soft “opportunistic” fraud
Exaggerating a claim to inflate the indemnity