What is the difference between peril and hazard?

The distinction between peril and hazard is crucial in understanding risk management and insurance concepts. A peril is defined as an event or situation that can cause a loss or damage, such as fire, theft, or natural disasters. It represents the specific cause that can directly lead to an insured loss.

On the other hand, a hazard refers to a condition or situation that increases the probability of a peril occurring. For example, if a home has faulty wiring, that increases the risk of a fire occurring; hence, the faulty wiring is a hazard. Hazards do not cause the loss themselves, but they make it more likely that a peril will lead to a loss.

In this context, recognizing that a peril is a risk (the potential for loss due to specific events) and that a hazard amplifies the chance of that risk occurring helps insurance professionals assess and manage risks effectively. Understanding this relationship allows for more accurate underwriting, policy development, and the formulation of risk management strategies.